Motley Fool Hidden Gems Investing - Investing in the Future of Food

Episode Date: June 27, 2022

Chewy gets and upgrade, while Coinbase gets a big thumbs-down from investment bankers. (:21) Asit Sharma and Maria Gallagher discuss: - Chewy’s pricing power and strong recurring revenue. - The cyclical problem facing Coinbase. - Reliance Industries offer to buy Walgreens’ international stores. A growing world population means more mouths to feed. (12:16) Deidre Woollard and Demitri Kalogeropoulos serve up three stocks, and explain how they are shaping the future of food. Stocks mentioned: CHWY, COIN, RELIANCE, WBA, BYND, KR, DE Host: Asit Sharma Guests: Maria Gallagher, Deidre Woollard, Demitri Kalogeropoulos Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Motley Fool Money starts now. I'm Asit Sharma, sitting in for Chris Hill, and I'm joined today by Senior Analyst Maria Gallagher. Maria, welcome. Hi, Asit. How are you? I'm doing well. Not too bad for a Monday. So, Maria, shares of Chewy this morning, hiring the markets on an upgrade from hold to buy by analysts at Needham, and they cited pricing power and supply chain improvement in their upgraded forecast. Now, as we tape, I think shares have leveled off some, but in general, a pretty good endorsement of this company, which a lot of investors have had some questions on. So I'm a big fan of Chewy. I've been a big fan of Chewy for a while. And what I think

what's so great about them is the recurrent aspects of their purchases and their stability of these revenues, right? So about 72.2% of their net sales are auto-ship customers. So people who say get their pet food delivered to them every month. And this is a really stable set and recurring set of revenue. And what's great about that is so you have that stability And then you see that growth increasing throughout the year. So in the first year, a customer usually spends less than $200. But by year five, if you have a dog, maybe your dog needs more snacks. Maybe it needs some medication.

Maybe it needs different toys. People are spending about $700 in their fifth year on the platform use. So you see that expansion from those recurring revenues. So they have over 100% retention rate for each cohort of their customers. And so over the past three years, they've gained about two-thirds of their active customers. So right now, they're at about 20.6 million. So it's going to be really important to see how those new customers continue with that recurring revenue and expansion platform that they have. And you see that logistics and customer service is going to be what continues to drive this relationship.

Chewy has a great reputation for incredible customer service. And getting your things on time is a very important part of this recurring nature, right? your dog needs to eat every month. So you need to make sure you get their food on time, their medication on time. So I think it's really important that that's what they're investing their time and their money in is both expanding their addressable market, expanding their options for what people can buy on the platform, but expanding their logistics service to get people the things that they need to over time. But I overall think this is a really great business and really resilient. So I want to go back to a statistic that you cited. They have gained

two-thirds of their customer base in a short amount of time, thanks to the pandemic. I think that's a large part of that. Is there some execution risk going forward with this big influx of customers that they won't be able to keep up these great metrics on customer retention and growth of the core cohorts as they go along? I know they've been straining at the edges a bit in the post-pandemic world with all the supply chain issues everyone else is grappling with. Do you think they're at risk of maybe dropping off some of their latest customers? Yeah. And I think that's what people are really going to be monitoring the next couple of quarters. What's interesting, I think, is what the convenience of Chewy brings to customers and

how much people value that. So before the pandemic, people will say, oh, fine, I'll just drive. I'll get the food, whatever. It doesn't matter. But I think once you start and you get in with that convenience, I think that a lot of people are going to not look back when it's every month. You don't need to think about it. You know it's going to show up every month. You have all of your options there. You can get stuff for the pharmacy. You can get all the toys. You can get everything you need in one place. I think that convenience, once you're in the habit, it's going to be really hard to break the habit. So I think that they have momentum with these customers on their side. So as long as they can keep up the supply chain and the logistics and the customer

service, which are the three things that are really important to keep those customers, I think that they would have to do something bad to get the customers to leave, if that makes sense. I think that the momentum is really on their side with these cohorts. Good. So this seems to be a case of just keeping on with what's working. Don't try to tweak it too much. Just execute. Yes, hopefully. And I really like Chewy. I think that they have a well-deserved reputation in the industry for their customer service. I think they have a well-deserved reputation for being reliable and those two things are going to continue to be the most important. So I'm glad to see leadership instead of saying, we're going to expand to all these different things that don't really make as

much sense. They're expanding where it makes sense with pet care, and they're really doubling down on logistics and customer service. Coinbase stock is down roughly 8% as we taped this morning, Maria, on a downgrade from Goldman Sachs, from neutral to the dreaded sell. Goldman cited lower crypto prices and decreased activity in the industry, both of which don't seem to bode well for a digital assets brokerage. Coinbase is really tough. It is, I think, a smaller part of the overall trend in the market. Coinbase is down about 80% from its all-time highs. It's so obviously heavily reliant on consistent purchases of crypto, which has heavily decreased. In mid-June, they announced that they

would take an overly aggressive stance on hiring. They cut 18% of their workforce. They also rescinded offers from people. There was a lot of that going around LinkedIn and social media saying people quit their jobs and then Coinbase rescinded their offers, which is not great for retention and hiring. If the company bounces back in the next couple of years, I think that reputation will stay with them. They also launched a social NFT marketplace in May. They're getting sales of about 19,000 sales per week, but that's compared to about 225,000 sales in the month of September of this year. So we're also seeing the tapering of interest in NFTs. I mean, I will say it's not just Coinbase. So Gemini is cutting at least 10% of its staff as

well. People are talking about this term called a crypto winter, which is kind of a bear market for crypto, but they don't have the historical precedence to believe that it can bounce back or that there's this intrinsic value within the assets to help them bounce back. And so the last crypto winter was late 2017 to December of 2020. And so people are saying that they're not sure if this is going to be the end of crypto, if it's just going to be a prolonged kind of slowdown in crypto, if it's going to make a comeback, it is just so much newer than the other markets we're seeing slow down. So I think that Coinbase isn't alone in having all of these problems. And I think it's kind of an indication of the wider interest in the crypto industry.

Do you think Coinbase could be at sort of the right place at the wrong time? And what I mean by that is, I've read through the S-1, their prospectus before they went public, and I thought their case was sort of convincing. And basically, I'll boil down the argument to this. When Bitcoin is rising, our volumes go up, we throw off tremendous cash flow. We use that cash flow in the meantime to extend into things like this NFT marketplace, into areas like DeFi. But these conditions in which we might be entering a crypto winter maybe they crimp the volume so much and hurt cash flow so much that it really won't matter how much of these peripheral parts of the crypto market or the digital asset market they expand

into. And maybe there'll be growth challenged for several years to come. Do you think this could be the case or am I being overly pessimistic about Coinbase and maybe the crypto market in general? The rationale for their business model is logical. I think it makes sense. I think it's a smart way to operate a business, but it is just so heavily reliant on consumer interest and consistent trading volume. So it's not only people buy and hold, it's people buy and sell and buy and sell a lot. Cause that, like you said, that trading volume really matters for their overall revenue. And so I think that when you take the decreased interest, the decreased volume, the decreased interest in not only that, but those peripheral businesses, like you're saying,

the business model makes sense, but the business model only makes sense when all of the other things are working in their favor. And I don't know for how long this is going to last where things are not working in their favor. Well, one thing the crypto market has shown us is that it's impossible to predict. Every time it seems like the market is just going to dry up, excitement builds again. It's a very cyclical type of market. So who knows? Maybe we see them just growing in a wave pattern, hitting some peaks and troughs over the next few years. News out this morning that Walgreens is nearing a deal to sell its Boots Pharmacy business in the UK to India's Reliance Group. Reliance is checking in with its

bankers, Maria, to raise up to $8 billion for a leveraged buyout of the Boots chain. What do you make of this deal? I think it makes sense. Like you said, they're trying to raise about $8 billion. Boots runs a network of about 2,200 stores across the UK. If you've been to the UK, you will see Boots the way we see Duane Reade, CVS, Walgreens everywhere here. This is really just a continued strategic shift for them more into the U.S. healthcare business. So Walgreens Health has been building out since October of 2021, which is this delivered healthcare platform. They have investments in VillageMD, Shields Health Solutions, Carecentrics. They have partnerships with Clover Health and Blue Cross Blue

Shield of California, with a patient population over 2 million. So they're really trying to focus more into the healthcare industry. So I think that it makes sense that they're trying to spin off that part to try and really focus on building out those capabilities within the U.S. healthcare network. Do you think that Reliance Group, which has so far been like a, I'd describe them as this multi-fasted conglomerate in India. Do you think they'll raise their profile a bit? It seems to be their first big acquisition or at least giant-sized acquisition outside of India. I know they've made a few forays into some other geographies. I think it could be because one, Boots is a really recognizable name. Also, Boots is growing. Their UK retail comps were up 22%

last quarter. So I think it's a good business and I think it makes sense for someone to want to buy it as well as it makes sense that Walgreens is trying to refocus strategically. They're not saying we're refocusing because this business is doing badly. They're just refocusing because they're trying to think of their future growth prospects. And so I think it's a really good acquisition for somebody to try and raise their stakes, but saying a growing business that still has a really well-known and reliable name and reliable footprint. Yeah. I'll point out being of Indian extraction here that Reliance is run by Mukesh Ambani, who's one of the richest men on the planet and a pretty savvy dealmaker. I'll be interested to follow this along and

see it from Reliance's perspective as well. Last question for you. For Walgreens, which has had, I think, a challenge in finding growth over the past several years, but it seems like a perennial company that might make a persuasive investment. I'm just curious about your thoughts, if they do go through with this disposition and focus more on that healthcare market. Is this a type of stock that you'd be interested in maybe rounding out your portfolio, which I'm guessing is sort of tilted towards growth, Maria, knowing you? Yeah, it is a little more tilted towards growth. I don't do a lot of healthcare investing personally, so I would have to spend more time looking at their strategic,

how their healthcare business runs from kind of an ESG standpoint and from the way I'm thinking of its potential growth. So I would spend more time looking at that, but I do think that I would be interested in it and I would be interested in spending more time looking at it. Yeah. Maria Gallagher, thanks so much for joining me. Thanks for having me. what's on your investment plate deidre woolard and dimitri caligari polos look at the future of food through three very different companies so to start off with i want to talk about beyond meat because i feel like as a culture we've we started to understand meat has a big cost, an energy cost, a water cost, a labor cost,

and it's a simple way to improve your diet, of course, but also make a change environmentally. And as someone who was a vegetarian and has been off and on for about 30 years, wow, the world has changed for the better if you're trying to eat meatless or even partly meatless because those early vegetarian burgers that you got at the sort of dusty health food store, they were bad. And I think what Beyond Meat has done and what Impossible Burger has also done is they've turned meat-free, plant-based into something that's kind of acceptable, viable, not a sufferer to have one of these. They're delicious. But the question I have for you, Dimitri, is does it make enough of a difference to just have this as a company? So, some news

recently was that Kellogg's announced it's splitting its business into three. It's got the snack business, things like Cheez-Its, Pringles, stuff like that. It's got its very popular cereals, and it's got plant-based, which is led by Morningstar Farms. That's kind of their lowest performer. It had about $340 million in sales with the Morningstar Farms brand. I'm looking at this. I'm looking at Beyond Meat's first quarter. What do you think about this, Dimitri? Is Beyond Meat going to be a winner in the long term? Yeah, that's the big question right now. I'm sure you've noticed the stock's been down a lot so far in 2022. It's looking a little shaky right now from the business standpoint.

Demand took a really sharp turn negative over the last, let's say, about three quarters, which is really jarring to see for a growth stock. The big question is, do people still have ... It appears that they don't have the same appetite for plant-based meat products that they did in earlier phases of the pandemic. Beyond Meat was seeing fantastic growth through most of the pandemic, and that really hit a wall in late 2021 and here into the first half of 2022. That could be a big problem in terms of our consumers just as willing to try new tastes. Basically, these are all new categories that Beyond Meat is trying to popularize. Chicken tenders and things like that, and jerky and all these different

sausage products. Ingredients and tastes that consumers aren't really aware of, so they have to be in this adventurous mood to try it out. Sales were essentially flat last quarter and they dropped the quarter before. Net losses were almost 90% of sales this past quarter. That's some jarring numbers to see. But at the same time, Beyond Meat is introducing a lot of new products, especially for the summer. They've got a new grilling value pack, which is really well-timed, obviously, for the summer grilling season of their Beyond burgers, and they're planning a lot more product releases into the second half of 2022. Management said a couple of months ago that they think a big factor behind slowing sales

over the last couple of months is that they pulled back on advertising and on promotions and on these new releases, in part because of the supply chain issue. So they're saying that that should help as those challenges are eased over the next few months. The company does have a super valuable brand, a lot of great partnerships with restaurants and supermarket chains. There aren't many other companies you can think of that have those valuable relationships. It's betting more on promotions and taste testings and things like that in supermarket chains.

I don't know if you heard, but marketing is a big push. They recently signed Kim Kardashian to be a brand ambassador for them. That's obviously a very big name. If you believe that these factors are going to support a rebound in sales, and that's what management is hoping, then I think the outlook could be bright for the business. But personally, I'm going to be watching for a little bit more of a demand rebound evidence of that in the next couple quarters before I would call Beyond Meat really a screaming buy right now. I like the partnerships. Their KFC chicken nuggets thing appeared to be a

good success. I even sort of like the Kardashian thing. But I think one of the challenges for Beyond Meat might be pricing and how they compare. Because in this inflationary period, People are really watching what they spend. How do you think Beyond Meat is going to do in a market where people are really paying more attention to what they spend? Yeah, that's a challenge. I think that's part of the appeal that boosted sales a lot last year. If you remember, or in earlier phases of the pandemic, we had a supply challenge around a lot of meat products at the same time that people were cooking at home a lot more often, so they were way more focused on cooking at home and seemed to be way more interested in

trying out new tastes. Now, as those supply challenges are eased on their substitute products like the other meat products, things like beef, pork, and chicken, that's another challenge. It's something that Beyond Meat doesn't have control over. At least, it's a risk to watch out for going forward, especially now that consumers are getting more price conscious. Yeah, totally makes sense. Let's move on and talk about another stock that you wouldn't necessarily think of when you think about innovation. That's Kroger. Kroger is a traditional grocer. But the more I study this company, the more I get impressed with their attitude toward innovation. So this is a big grocer. This is over 1,600 stores, over 400,000

employees. Yet they're doing some really innovative stuff in terms of distribution, in terms of fresh foods, in terms of digital. Dimitri, how is Kroger planning for the future? Yeah, you're right. Kroger has a lot of really interesting things going on. Their main market share battle is with Walmart, the biggest retailer in the nation. The focus for both companies has really been fresh food lately. They realize, they both understand, that most consumers make their decision about which grocery store they're going to go to based around that idea of the fresh food, which one has the better fresh produce.

Kroger's been succeeding a bit better, I would say, than a lot of its rivals in this regard. The past quarter, the company just said, I believe it was mid-June, they revealed that growth continued over very strong growth a year ago. Flowers were a standout performer, for example. We know that's a very perishable item. I think it's a big testament to their entire supply chain that Kroger can succeed in a niche like that. Kroger is a very vertically integrated business, too. They've got the supermarket chains and this huge network, but they also own a lot of their own transportation. They own many farms. They own their own dairy farms, things like that. That vertical integration has given

them a lot of flexibility in today's environment, where they're not dealing with a whole bunch of supply chain bottlenecks. When you own the transportation, you can move it around and you don't have, surprise, extra costs that a lot of these other companies are dealing with. Then you've got their move into home delivery. Like you mentioned, their Okada platform is very popular. That's something that's going to just continue to grow, this whole idea of getting food delivered and groceries delivered to your house. We're seeing these platforms get closer and closer to big populations all around the country. Eventually, we're going to be seeing same-day delivery for basically the entire country. And I think that's an area that

Kroger is going to succeed in. But I wanted to highlight one quick comment, too, that CEO Rodney McMullen said in the earnings call in mid-June. The quote is, in this dynamic environment where consumer behaviors are changing rapidly, we use our data and insights to be nimble and react quickly to ever-changing needs. And he's talking about they've got this data mining, really big platform that tries to project merchandise needs and things like that and make a very personalized shopping experience. Flexibility has been really important since the beginning of consumer sales, but it's even more important, I'd say, today because preferences are changing so quickly in response to inflation, like you mentioned, and the pandemic. Kroger seems to have a really

good reading, I would say, on those changes, as you can see from their growth in their last quarter results. They grew a bit faster than Walmart, and they seem to be on a good market share trajectory. And as we turn to our last stock, it's not a company that you would think of as a data company or a tech company in any way, but it 100% is. So, I want to talk about John Deere. This is a company that's almost 200 years old. You know, you think of those green and yellow tractors. This doesn't sound like an innovator, but they recently held their their sort of investor day, and they went over some of the innovations they're doing right now, and it is fascinating. One of the things I found most interesting is in some ways John Deere is

leaps and bounds ahead of other autonomous driving, because if you're in the field, you don't necessarily have to worry about some of the things that you might encounter on a city street. But even more interesting for me is the kind of digitization of the farm, and they're taking this in a bunch of different directions. It's things like mapping so that they can do precision application of seeds, pesticides, nutrients, all based on climate data, micro climate forecasting. They're building really robust satellite tech so that they can sort of feed all of that information to the tractors. Some of the tractors now, they're autonomous, they're totally running by themselves, and they can pivot based on the information they're getting

in real time. I mean, that's kind of amazing. They've got a lot of partnerships, over 250 connected software systems, all feeding in data, receiving data. So it's actually this massive kind of tech network. And the other part that's really interesting that connects with that is they're getting close to selling a million cameras every year. So all of that information is going right into training AI machine learning for really for making a better farm, because farms are facing a lot of challenges, climate change, obviously, but labor, labor is a huge problem. So getting closer to robotic pickers and things like that. And one of the things I thought was really interesting from that presentation was that they referred to sort of the operation center as the

digital twin of the farm. So, we've seen digital twins in the building space, where you have a skyscraper and then you have a digital twin that exists and allows you to see, using sensors, what's happening with the building and make changes without having to actually be inside the building. Same thing can be true of farms. So, what they talked about is creating this system of record in agriculture. So, all of this data comes in. Farmers can now see data from each other, it's kind of anonymized to avoid competition and things like that. But all of it is around making better decisions about how they plant, when they plant, how they use pesticides. All of that information is kind of funneling into this. And I think this is amazingly cutting edge.

So, Dimitri, I don't know if you've studied some of the ag tech stuff, but how do you think tech in general is impacting this and other farming businesses. I was pretty impressed by how much technology goes into their tractors right now and how much they're applying that into the farming world. I've followed autonomous driving cars and that's been very interesting. But like you say, the technology they're applying to the farming process, they've got tractors that precisely understand where the planting happened so that it can calculate the exact next line to move down the farm. Small amounts here, maybe an inch or half an inch here and there, but that really adds up when you're talking about acres and acres and

acres in terms of squeezing extra efficiency. If you can get an extra couple percentage points of efficiency out of that, that would be a fantastic bonus for your yield. Just some of the AI uses and how they're making things like the fertilizer and weeding and cultivation and then protecting the crop, all that stuff's getting better, I think, with the application of these technologies. And I think that's an exciting thing for the ag world, I think. I've heard about there's some companies that are focused on that vertical farming and things like that, the indoor farming idea. But I think it can be easy to forget when you're looking at that thing that there's actually an opportunity to make traditional farming a lot more efficient over time using these kind of technologies. So, I think there's a long runway for that to improve, too.

Yeah, yeah. I think it's interesting you mentioned the vertical farming companies. like, you know, there's Bowery, there's a couple of other startups that are doing interesting things. I think you're right. And basically, what we know is it's going to take all of that. It's going to take vertical farming. It's going to take, you know, optimizing fields. It's going to take, you know, better distribution in grocery stores and reducing waste. It's going to take consumer changes, things like Beyond Meat and making a commitment to eating things that are that are a little more easy on the planet. All of this kind of comes together to really

deliver this kind of picture of the future of food that I find just so fascinating. I think we've just scratched the surface here. So many other things I wanted to talk about with this, but thank you, Dimitri, for your time. I really hope we can do this again. I think this topic is so vital for investors and really just anyone who eats to understand. So, thank you. Thank you. Yeah, I had a great time. 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 Asit Sharma. Thanks for listening. We'll see you tomorrow.