Motley Fool Hidden Gems Investing - Consumer Spending is Tightening Up… Kind Of

Episode Date: June 2, 2023

Americans are thinking twice before pulling out their wallets, but it’s not affecting retailers equally.  (00:21) Ron Gross and Emily Flippen discuss: - The debt ceiling resolution, and updates on employment and consumer debt. - Why Chewy and Five Below continue to see strong results while other retailers are seeing consumer spending slow down. -  The numbers behind MongoDB’s blowout earnings release. (19:11) Scott Kassing talks through three high-conviction stock ideas with Sandhill Investment Management’s Richard Ryskalczyk. (32:49) Emily and Ron discuss Lululemon’s strong earnings report and two stocks on their radar: Compass Minerals and Veeva Systems. Stocks discussed: M, CHWY, FIVE, DG, MDB, LULU, CMP, VEEV Host: Dylan Lewis Guests: Emily Flippen, Ron Gross, Richard Ryskalczyk, Scott Kassing Engineer: Dan Boyd, Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

Jason Moser. We've got plenty of news on the big picture and where consumer spend is and isn't going. You're listening to Motley Fool Money. everybody needs money that's why they call it money from fool global headquarters this is motley fool money it's the motley fool money radio show. I'm Dylan Lewis. Joining me in studio, Motley Fool Senior Analysts Emily Flippen and Ron Gross. Great to have you both here. How are you doing, Dylan? Hey! We've got stock ideas and some earnings surprises, but we're kicking off with the big macro.

We've got the debt ceiling deal, a fresh jobs report, and an update on consumer debt. Ron, where do you want to start? Let's go to the debt ceiling because I think it's on everyone's mind. I'll say few. Few! How about that? Yeah, we got it done. I honestly didn't think it was in jeopardy of not getting done, although there were a few days here and there where it seems like our politicians might not be able to come together. But it was literally a necessity. So, when something is literally a necessity, I think it's fair to bet on that happening. It was a compromise, as most things in politics are. That's fine. Some give and take. We live to fight another day. Whether there should be a debt ceiling or not is a

political question, not really an investing one, so I will leave that for other pundits. But I personally am happy it got done. Friday's stock market is strong, I would think, partly as a result of that being accomplished. I'm going to speak for the market and investors everywhere and say, I'm just happy that the government will have the ability to pay its bills for the foreseeable future. Emily, apart from that, anything you'd add to the debt ceiling? Yeah, I love this game of chicken we play with our financial systems. Lots of fun for investors in the market. But in all seriousness, we do get some interesting developments out of these

occasionally. And I think we saw one today with the debt deal. The deal to raise the debt ceiling actually cut IRS funding that was granted as part of the Inflation Reduction Act by upwards of $20 million. It was an $80 billion deal. So, that could impact the development of a free federal tax filing system, $20 billion, excuse me. So cutting that by $20 billion, maybe the IRS doesn't come in, doesn't develop their own tax system, which had been previously a priority of that government agency, which could be a net positive for some of the free tax filers that already exist out there, like Intuit's TurboTax. So just seeing where the federal government spending is going to shift potentially over the next couple of years, that's one of the things that was standing out to

me. Sticking with the big picture, we've also got a fresh jobs report Friday morning. U.S. employers added a seasonally adjusted 339,000 jobs last month, and unemployment currently sits at 3.7%, up slightly from recent months. Ron, what stood out to you in the report? This one is interesting to me because the jobs report came in hotter or better than expected, but there was a mixed bag because unemployment did tick up to 3.7%. Now, that's due to a sharp decline in self-employed data, people who identify as self-employed. That's interesting a little bit in and of itself. But interestingly, the markets reacted positively to the strong jobs report. Now, that is counterintuitive to the usual counterintuitiveness. It's the same as

double negatives make a positive. Usually, you would expect the markets to sell off on a strong report because that gives the Fed cover to continue to raise rates if they feel they need to. Strong labor market leads to higher wages, wage inflation that keeps inflation persisting. But just when you thought you had these things figured out, the market goes ahead and pulls a 180 on you, trades higher. Maybe it's the debt ceiling. Maybe it's that some of Friday's data did show a moderating in wage inflation. And that is good news. Maybe not for the person earning the wage, but for the economy as a whole and what the Fed is trying to do to slow the economy. But we had a very strong Friday on this hot jobs data.

I will say this. I think part of it could also be the presumption that the federal government is not going to raise rates despite what a strong jobs report this was. And I know that sounds kind of counterintuitive because the Federal Reserve has said time and time again, no, we're going to do what's best for the economy, regardless of how the market reacts, regardless of how other pundits react, we're going to do what we think is best. But I think part of their job is managing expectations. And so many consumers, Americans, investors, the market, you be it, they've already kind of baked into their expectations, no near-term rate increases. So, part of me wonders if they're taking that for granted and expecting

things to stay the same, even if the jobs report is strong. We generally don't factor the interest rate movements too, too much into our individual investment decisions. Is there anything in here, Ron, that you would look at and say, this is kind of what I expect? I know the jobs report can be a bit of a gumbo as we look at it. But is there anything that you would say, yeah, this is where I'm leaning with where the Fed might be going? Well, I think the economy looks strong enough right now where I don't expect a recession to be imminent. So, the big R word keeps rearing its ugly head as the Fed continues to raise. I'm not necessarily sure the Fed is

actually done raising completely. Maybe there'll be a pause. Maybe we'll get 25 basis points here or there. Maybe the economy will slow as a result in 2024, but I don't see it imminent. I think we're going to be relatively okay. Even if a recession happens, I think it will be shallow. At least that's the way the numbers seem to be shaping up right now. One more data point that might have gotten lost a bit in the shuffle this week, consumer credit and revolving debt continues to rise and is nearing $1 trillion, according to the Fed. This has been an interesting metric to follow over the past few years. It is currently clocking in at all-time highs, Emily, up 25% since 2021. Does that have you concerned at all?

Well, it doesn't have me shocked, that's for sure. We've seen record high inflation. We've seen a pandemic. We've seen just the general lives of, I think, average Americans be really negatively impacted by the cost of living. And so, I'm not surprised to hear that a number of those Americans are increasingly putting necessities on their credit card bill, which is what I think this probably is. People trying to pay for things like groceries or phone bills, stuff that is no longer discretionary but necessary. So, it's good to see the economy somewhat being strong. Hopefully, that number comes down. But with inflation the way that it is, it's not a surprise to see credit card debt rise. And let's be careful when we say consumers are strong, because if it's at the

expense of their savings or at the expense of a higher credit card bill, that's really not the definition of strong to me. And I think we can talk about this a little bit later. We're starting to see that show up in some of the retailers that focus on lower income shoppers. And so the Fed appears to be maybe getting what it wants, which is a slowing down of the economy and spending. But consumers may be making up for that by dipping into savings or debt. Let's zoom into that retail space a little bit and start examining that. I think, as we start to see consumers get stretched, you wonder where dollars start to go. We look at some results like those from Macy's this past week, really a seemingly

solid quarter meeting expectations from this business, but it cut forecasts for the top and bottom line for the rest of the year. Reading through the call, Ron, it seems like they are being cautious as they look out, and a lot of retailers are, as they're planning the rest of the year. They are. It depends where you're focused. Macy's is seeing weakness in discretionary categories, as I think will be a theme as we go across, whether it's TVs at Target or some discretionary items at Macy's. That's where they're being cautious, appropriately so. This stock is still off 40% from its 52-week high. So, even though perhaps some of this data from this quarter met expectations, it's

still relatively weak, with sales down 7%, brick and mortar down 6%, digital sales down 8%. There are some real weaknesses continuing in this business. You did have a slight increase in gross margins, but that was offset by higher operating expenses. It all boils down to earnings per share down almost 50%. This is a weak business currently in this environment, causing them to lower guidance. Again, demand trends weakening further in discretionary categories is what the CEO said. They're going to have to continue to take markdowns. They're going have to continue to address product mix, deal with high inventory levels, and hopefully have it work through the system. They maintain their dividend, 4.8%. Stock's only trading

four times updated earnings. If you want to take a shot on a retailer that's been around for quite some time getting their act together, that could be interesting, but things currently are weak. You mentioned management's comments. They said, selling to the effect of consumers are pulling back in retail spend and reallocating to food, essentials, and services. As we look to earnings from other companies, looking at Chewy here, pet supplier, it seems like, Emily, people are still very comfortable spending on their pets. Yeah, here. I have a bone to pick with you, Dylan. People always seem to want to give credit to Chewy's success on factors outside of their control. You just said, oh, well, pet spend is up, so Chewy's doing well. But this

quarter, the past couple of weeks, have been a great example for why that is exactly not the because you can look at Petco. Petco reported earnings, I believe, last week, and the market was extremely disappointed because of management's commentary around the fact that consumers aren't making this discretionary spend. Their margins are weak. The economic environment is getting worse. Meanwhile, Chewy comes out, and it's almost the exact opposite story. Sure, maybe the discretionary spend has fallen, but they're saying, look, people aren't trading down on their pets. They're still buying the premium items that have slightly higher margins, the premium foods, the premium toys, because that's how much they care about their animals. That's a deep relationship

that Chewy has with their customers is that they understand the value of Chewy's platform in a way that I think Petco doesn't quite understand. Chewy knows, look, I have a cat. I also recently bought a house. Do you know how many ads I'm getting from Chewy about cat towers? I have three cat towers coming to me in the mail. Petco doesn't know that about me, despite the fact that I can shop at a Petco and I have bought food at Petco before. Chewy just has a better understanding of its customer than other pet retailers. That's what we saw showing up in this quarter, just incredible results, expansion of margins despite the fact that the economic environment is weaker. One of the things I wanted to dig into was that relationship with customers.

I think one of the ways that it shows up in the results we saw from Chewy was those auto ship sales. Those were up 19% year over year, outpacing overall revenue growth for the business. I have to think, if you're a retailer, having that type of relationship with your customer has to be the dream. Yeah, the relationship is great. I will say, as an investor, it makes me a little bit nervous because, as you mentioned, nearly three-fourths of all sales are coming from their auto ship program, which is great. That's a deep relationship, a deep understanding of what those consumers need, but they don't exactly have a lot of room for improvement from those levels. There is still going to be a portion of their sales that are happening spontaneously. I realize

that I need something. I need it delivered to me quickly. Chewy has the best offer. I'm going to buy it quickly. Maybe that's off-cycle from when I would normally get an auto ship. If that's a key metric that investors are looking at, I wouldn't be surprised to see that tick down at some point, even marginally in future quarters, just because it's already so high. And the same is true for their net sales per active customer. For the first time in Chewy's history, it surpassed $500 per customer, which is incredibly high. And we've seen that grow as the relationship deepens over time, but we've also seen incredible levels of inflation, pet inflation in particular. So that's also potentially artificially inflated by the price of the goods that people are buying.

I wouldn't be surprised if the economy or inflation comes down to see both of these metrics come down as well. After the break, we've got more retail news and updates from tech companies. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Dylan Lewis here in studio with Emily Flippen and Ron Gross. We were talking retail earlier, and the theme of slowing consumer spend is very present right now. but it seems to be hitting retailers differently, Ron. We look at results from discount retailers Dollar General and Five Below. We see slightly different narratives with these two companies in their earnings reports. Yes. It's a little bit surprising

because you would assume they have a similar client base, but it's not exactly the same. Dollar General is indicating that due to the macroeconomic environment, business has been quite challenging. Their customer base, which is lower-income shoppers, are shifting their spending to basic goods and cutting back on discretionary purchases. Not different than we saw in Macy's or Target or any of the other retailers that have been reporting. That shows up in their numbers, but more importantly, it shows up in their guidance. The stock got slammed as a result of that guidance because it is relatively weak. Now, with Five Below, even though a similar customer base, it's a little bit different.

They have slightly higher price points. They have some stores that are even higher than the typical store's price points. And they're very good at creating the merchandise mix that the customer is looking for. And as a result, the metrics that they put forth in this earnings report are really strong. And they were able to tighten their guidance, not raise it, but tighten it, because they have a better outlook into the future, which is also interesting, because this is a very uncertain environment. Their numbers continue to look strong, including opening 200-plus stores and continuing to expand. They're two very different reports, and you may not have guessed they would be at the outset.

You mentioned the store opening plans. That was another place where these two businesses diverged a little bit. We saw in commentary from management, Dollar General say they are going to be a little bit more opportunistic with real estate and may slow some of their expansion plans, believing that perhaps there may be some real estate deals for them in the future. Ron, I wanted to ask you, is that something that you buy as a commentary from management, or do you think that is a nice way to say we are altering our plans for the rest of the year?

Well, for sure, they're altering their plan for the rest of the year. Dollar General is going to slow the spend, which, by the way, is what you want your company to do if things are not going that well. Despite your desire for a company to grow, if the environment is not right, then you do want them to slow. On the other hand, Five Below is going to their Five Beyond concept, which is a little higher price point. That's where they're focusing on a little bit of the more high-end consumer, where they think the opportunity lies. It will be interesting to see the next report and the report after that, how things are going. Switching over to tech, MongoDB posted some

eye-popping results in the first quarter report this week. Revenue for the database software company was up nearly 30% year-over-year to $370 million. Net losses came in ahead of expectations. Emily, I was looking at this report, and to me, it seemed like one of those earnings results where, pick a metric, and the company did a pretty great job. Yeah, I was eye-popping to everyone, including management themselves. If you listen to the call, management almost sounds confused about why they did so well. That's not good. They said, you know, we had all these expectations for what the first quarter could look like,

but man, did it really do better. And so if you read through, yeah, virtually every metric across the board was performing well. And that's great for a business like MongoDB because they're competing with other database solutions from cloud titans like Amazon, Google, Microsoft, Oracle. So they need to have those customer wins. And we saw those customer wins, especially on the large enterprise side, come through this most recent quarter. But what I found really interesting was the fact that they attributed some of their unexpected success to actually AI and machine learning uses. Shocking. Shocking, exactly. Well, it actually is interesting, though, because their NoSQL database,

which is better for unstructured data, plays really well into the hands of the unstructured data that you typically get from things like AI programs. But 10% or so of the customers that they acquired in the most recent quarter were specifically using their solutions for AI or machine learning, which is a large portion, probably responsible for that unexpected win. Depending on your opinions about AI or machine learning, that could probably factor into how you expect MongoDB is going to do in terms of eye-popping results and future quarters on the plus side or the downside. One of the things that I wanted to dig into in the comments from management in this report was, the CEO said they're seeing customers continue to scrutinize

technology spend, and they are looking to separate the must-haves from the nice-to-haves. From everything I'm seeing in the results here, it seems like MongoDB is firmly on the must-have side for a lot of businesses. That's what management wants you to think. They spend virtually the entire call explaining all the different use cases they have, especially with some Chinese companies as well, like Alibaba, and how they've implemented their solutions to decrease their cost structure, improve efficiency, and it's great. They do seem to have a lot of wins. Now, whether or not something's actually necessary, the number of amount of consumption that happens on the platform, we've seen that decline as

as consumption has declined just across the board because of the broader economy. So, it might be a must-have, but consumption is still a big question mark. Ron, one of the things I wanted to ask you about was, we know customers are going through this mindset and this approach to looking at where they're spending their money. Is it fair for investors to take a similar approach as they look at some of the names, especially the tech names in their portfolio? Well, Meta has declared this the year of efficiency, and we're seeing that across the board, whether it's becoming leaner or meaner or doing layoffs. And so, you do want your company is reacting to the current environment, even if that means selling

off an underperforming subsidiary. As investors who own, hopefully, a diversified portfolio, you want to make sure you own the stocks that you're most comfortable with that are taking the steps necessary to outperform. Emily Flippen, Ron Gross, we'll see you a little bit later in the show, but up next, we've got some high conviction ideas to keep an eye on. Welcome back to Motley Fool Money. I'm Dylan Lewis. We love getting stock ideas here at Motley Fool and getting other perspectives on the companies we follow. The Fool's Scott Cassing sat down with Richard Ryskalsik, the chief equity analyst at Sandhill Investment Management, to get a bit of both. The two talked about some of Sandhill's highest conviction ideas

right now in cybersecurity and healthcare, and how their team is analyzing high-growth companies in the current environment. If you don't mind, there's one name on your high-conviction list that I wanted to start with, and that is Palo Alto Networks, ticker symbol P-A-N-W. And the reason being is the industry it lives in, cybersecurity, and the consensus around that. I haven't met an equity analyst who's bearish on the space, right? Everyone believes five years from now, it's more relevant. Where I do see non-consensus is who the winner or winners will be. And in a space like this, I'm so tempted to just buy an ETF or a basket of cybersecurity stocks? From your lens, why is that not the best approach?

Why Palo Alto? I mean, so, you know, from the highest level, agree completely. I fully understand that, you know, there is, you know, consensus long this entire area and for good reason, right? There's just so many continued cyber threats, whether that be from foreign entities or smaller hackers to large governments that's that's not going to stop and then when you layer on top of that just the continued larger attack surface that's out there right you not only now have your internal network you have your cloud hosted data you have all of your employees working remotely on multiple devices you just you have a massive long-term secular growth opportunity in this industry and so you know it it's a hundred

billion dollar plus market growing 14 so i understand why everybody likes this area and and to your point there there's a lot of fragmentation there there's a lot of competition in the space right you've got the cisco's of the world the junipers the semantics the checkpoints So all of these sort of, I guess I call them the old guard, if you will, much slower growing. You've got some of these newer guard platforms like a Palo Alto or a Fortinet. Obviously, Microsoft is huge in the space, too. And then, you know, I think your point is there's a lot of other smaller point solutions like a Zscaler or a CrowdStrike or a Sentinel-1. So, you know, why not just own a basket of all of them?

And I think it goes down to what is the valuation on each of these? where what's you know what's the valuation relative to the growth rate what is their free cash flow look like so we generally stay away from some of the ultra high growths that are not yet profitable just because it's so difficult to figure out exactly when will they hit profitability and and specifically on some of those point solutions it's hard to see how in the long run you know that they're able to hold on to their niche or their competitive advantage because there's always the next threat and the next piece of software to come out. And so what we're really seeing, and one of the reasons we like Palo Alto specifically,

is on top of this just general cyber trend, and we're seeing this throughout all of software, is you've got all these multiple point solutions that these CTOs have at these large enterprises. Basically, their heads are spinning trying to manage all these solutions, trying to stitch them all together. Where are there holes in that? And so what we see is this continued consolidation down in the number of vendors that these larger enterprises are utilizing. And they're shifting more towards these broader platform solutions. So not only do you have the broad trend, but you've got a player like Palo Alto who's built a really phenomenal platform solution to take care of really all of the main issues within the cybersecurity space today. So that's why we're pointing specifically at Palo Alto.

So maybe an unofficial prediction, there could be some M&A activity in the space in the future. And Palo Alto's, I guess, one-stop shop reputation gives it an advantage over maybe an Okta, which is very specialized and meant to be a compliment. Is that fair? Yeah, no, I think that's a great characterization. And Palo Alto, you know, this has been a trend we've followed for many years, as I'm sure, you know, many have. And Palo Alto went through a period of time where they actually, you know, were the consolidators in the industry. And they bought up a handful of businesses and then worked to recode and retool everything onto this one platform. So they were a consolidator.

But, yes, to your point, like an Okta, for instance, you know, that point solution, that can be replicated. And when you can replicate that and you toss that onto a broader platform, you know, I think some of those motes that maybe an Okta might have had when they first came out start to erode a little bit. One company in particular I'm really excited to talk about that I think is probably the least familiar to our listeners, and that is Transmedics. I came across this company when I saw a stat that said, I believe only around 20 to 25% of hearts and lungs that are donated are actually transplanted. And that level of inefficiency just boggled my mind. Could you give the listeners just a brief breakdown into what exactly the transmedics business is and your thesis behind it? Sure. Yeah. So transmedics, It's definitely our earliest stage investment as far as, you know, the life cycle of the business is concerned.

They're still very early on in trying to accomplish what they're looking to accomplish. And so the company is, you know, as you pointed out, they're looking to revolutionize organ transplantation. And so, you know, as you mentioned, I think when you look between heart, lung, and liver, maybe only about a third of those overall organs that are donated are actually transplanted. And for heart and lung, yes, it is about 20% or so. So, you know, you check that organ donor on your card, but very low likelihood that those organs actually get donated. And a big piece of that is just the limitations of the current system, being that you have limited time to transport, you have limited distance because of that, that you can transport these organs. And, you know, the standard of care right now is that these organs are basically shipped in an igloo cooler. And so, you know, sitting there on ice, essentially.

And so you see all these other advancements in the healthcare industry, and you say, how is this possible when you have heart surgeons who have spent, you know, a decade in school learning how to, you know, do these transplants, essentially going and putting the heart on ice and taking it into a plane and getting it from patient A to patient B. It's pretty astounding that that's the level of this industry. And so what Transmedics is looking to do is really take their now FDA-approved, what they call their organ care system, this OCS medical device, which keeps the lungs breathing, the heart beating, the liver going, and allows the transplant team to monitor the vitals of these organs. and it allows them to keep these organs basically alive. And so, one, you see what the vitals are, which is a huge piece of it, but two, you can keep them alive for much longer, so you can take them on longer flights for longer distances, and it's really looking to completely revolutionize this whole marketplace.

Yeah, for sure. Well, look, it's got such a good-for-humanity mission that it's tough to root against. Now, I will say the market certainly has been paying attention. I think if I look at it today, the stock is up 37% year-to-date. So, that's the question I have in my mind is, I love the business, but do I love the stock? So, how do you go about valuing a company that is fast-growing, but it's not yet profitable, and we could be entering a recession in late 2023? How are you balancing the risk and the opportunity there?

Sure. Well, you know, when you step back and you look at it from the 40,000-foot view and you say, what's the opportunity here? Well, you say there's about 17,000, you know, organs between heart, lung, and liver that are transplanted per year, and Transmedics has a goal of, you know, essentially doubling that, you know, over time. If they can go and do that, right now they've got about 10% share of the current market and they want to become the standard of care.

So not only do they want to take a large share of the current transplants that are being done, but they then want to go and double the overall marketplace. So if they can even work their way anywhere near towards that, and they're almost at a level of profitability now. in the most recent quarter, I think their revenue was up over 160%, and they only burned through, I believe, about $6 million in cash. So they're well on their way to getting towards profitability here. And if they can keep up, they're not going to keep growing 162% by any means, but if they can keep the growth rate up and hit some of the levels that they want to hit

as far as penetrating this marketplace and growing the overall market you know there's a there's a ton of upside to still be had from here yes yes it's had a nice run in throughout 2022 and and thus far into 2023 but if they're able to you know looking a few years out get to the penetration rates that they think they can from here and get to some profitability i think you could still see the stock substantially higher from here in the not-too-distant future. Now, you're starting to talk about not just a price-to-sales metric, you're starting to talk about actual free cash flow and a PE multiple. We still think there's a lot of upside here. Well, you touched on it at the end. I would say there's a renewed respect for valuation amongst our listener base post the

growth stock collapse of 2022. When you look at transmedics, priced earnings isn't going to tell you anything. It's in the negatives. So, is price to sales the multiple metric that you would encourage an investor who has this on their watch list to focus on? Or is there a better multiple metric to keep their attention towards? Yeah. So, when we talk about it here internally, we look at it a handful of different ways so even though they're not currently profitable we still have gone and you know built out our our model on where we think they can get to as far as penetration rates and growing the overall marketplace and then you you know take a look at where they think you know over the medium term the gross margin can be and kind of work down from

there to get towards a profitability level so you can look at potentially putting earnings multiple on a handful of years out from now and then discounting that back you could look at all right maybe it's at 12 times sales right now but in a few years from now if they can get to 500 million in revenue and in 2027 that sales multiple will contract you know maybe that contracts down to 10 times and that's that's 150 stock and a 20 percent cagger from here and you know based on some of the assumptions we've made you know a certain level of profitability in that you know maybe that's a 50 times earnings multiple for something that's still only you know maybe at that point 30 penetrated and still has room to substantially grow the overall marketplace

as well from there which i think is is more than reasonable so there's there's a lot of different ways to look at it from you know multiples on on current years sales to all right let's do a dcf based on expected profitability to all right let's let's look a few years out in the more medium term and put a multiple on it and discount that back. We've looked at it a handful of different ways. Coming up after the break, Emily Flippen and Ron Gross return with a couple stocks on their radar. Stay right here. You're listening to Motley Fool Money. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks

based solely on what you hear. I'm Dylan Lewis, joined again by Emily Flippen and Ron Gross. We have one more earnings story before we get over to stocks on our radar. Ron, a strong update from Lululemon this week. The athleisure company posted 24% revenue growth and raised its outlook for 2023. This seems like good news for a company that probably needed some good news. They've had some stumbles of late, but overall, a very strong company. You're seeing the real divergence here between the high-end consumer and the lower-income shopper that we discussed earlier, where we're seeing some weakness in companies like Dollar General. Lulu, a very strong report, as you mentioned.

Strength internationally up 60% on a 79% increase in sales in China as China continues to open up. Comp sales up 13%. Direct-to-consumer up 16%. That's 42% of sales now, which is interesting because it's down from 45%. So, more in-store sales of late. Just something to keep an eye on. Gross margins were up. Operating income was up. Earnings per share up 54%. Really strong. On the back of a little bit of a flub in their mirror business that they acquired relatively recently for $500 million, wrote that down, looking to sell that, moving that business to an app-based solution, which I think makes good sense. They needed to work through that, put up some good numbers to have investors focus on some other metrics and not the mirror business.

Or relatively recently, Ron. That was three years ago. That was peak pandemic hype. Not surprised at all. I don't think anybody was to see them want to get out of that home fitness business. Peloton is just continuing to be a dumpster fire. So, it's a great example of why it's probably not advantageous for Lululemon to hold on to that, especially when their core business is performing so well. But my big question mark is, how far does the pricing power for this company go? I mean, I love my Lululemon leggings. They are expensive. And I still have a hard time justifying the purchase, but I do justify it to myself. I mean, do they have Apple-level pricing power? Or is it more like Chipotle, where at some point,

the Chipotle burrito is not worth it? Now, can they hike the prices? Yes. Will I pay up for the Chipotle? Yes. But it doesn't go as high as, say, my iPhone. So, that's my question mark with Lululemon long-term. All right, let's get on to our radar stocks. Our man behind the glass, Dan Boyd, is going to hit you with a question. Ron, you're up first. What are you watching this week? Oh, Danny boy, you're going to love Compass Minerals, CMP. Roots go all the way back to 1844, leading producer of salt for highway de-icing. That's about 80% of sales. The rest comes from plant nutrition, sulfate of potash, SOP, if you will. Now, it's not all peaches and cream, Dan. Weather conditions have hurt the business. They have a rough time passing on inflationary price

increases because contracts are done well in advance. But new leadership is making some really strong moves to improve operations, shore up the balance sheet, improve profitability. They've got some new lines of business around lithium and some other new items that build on their core companies that should spur growth into the future. It's somewhat of a turnaround play, but it's worth keeping an eye on. Dan, a question about Compass Minerals? Yeah. Ron, how many cars do you think that Compass Minerals is responsible for completely rusting out in the Midwest, Upper Midwest, and Northeast. I'd rather have rust than be unsafe, Dan. That's a good point. I think listeners are

used to hearing AI, perhaps not as used to hearing potash. Am I saying that right, Ron? Potash. Potash on the show. It's nice to work that in. I'm sure there's some folks out there that were happy to hear it. Emily, what is on your radar this week? I'm looking at Viva Systems. They're a software business aimed at the life sciences industry. And they had an unusual quarter this week, mostly because the stock is up something like 15%, which is very unusual for a company that is incredibly stable, as Viva has proven to be. But a seasonally strong quarter for them, which is wonderful, unexpectedly wonderful, right? This is a business that has

been expanding its margins or looking to expand its margins, growing sales rapidly. But there's a big question mark right now about how much money they're spending on building up the functionality of their core CRM products. And with their migration away from Salesforce to their own servers, they're hoping that by 2025, they can really start expanding margins. But there's a good argument to be made that the valuation looks really frothy right now. Dan, a question about Viva Systems. In February, they became a public benefit corporation. Since then, their stock is down $90. Emily, is this altruism damaging their business? Look at that! Shareholders are not happy about the full

stakeholder relationship. No, this is the broader slowdown in software that's causing the reaction we're seeing from Viva, plus their valuation. I'd actually argue that their move to become a public benefit corporation, think about all their stakeholders, is probably going to be a net benefit for this company over the long term. Dan, you're really getting two different ends the spectrum here. Ron is giving you earth materials to work with, and Emily is having you focus a bit on the future of the software. Which company are you putting on your watchlist? You know, I want to go with Minerals, because I just think it's more fun, like salt mines and potash. Who doesn't love that stuff? But I think I'm going to go with the Public

Benefits Corporation and Viva this time around, Dylan. A wise choice. Appreciate it. Emily Flippen, Ron Gross, Thanks so much for being here! Thanks, Dylan! That's going to do it for this week's Motley Fool Money radio show. The show is mixed by Dan Boyd. I'm Dylan Lewis. Thanks for listening! We'll see you next time!