Motley Fool Hidden Gems Investing - Now Serving: IPOs, Exits, Extra Cheese

Episode Date: March 3, 2025

A fresh IPO, outgoing CEO, and Domino’s finally joining the field on stuffed-crust pizza. (00:21) Bill Barker and Dylan Lewis discuss: - Mixue’s splashy debut on the Hong Kong stock exchange, and how the boba tea chain stacks up to Starbucks and McDonald’s. - Rodney McMullen’s departure from Kroger and what’s next for the nation’s largest grocery chain. - Domino’s finally delivering what the people want: stuffed crust pizza. (17:41) Have you seen a med spa in your neighborhood? Mary Long caught up with analyst Nick Sciple to find out why this industry is booming and one company that’s selling a few products that can help you look a little younger. Article discussed: https://www.bloomberg.com/news/articles/2025-02-19/med-spas-boom-with-botox-lip-filler-weight-loss-drugs-in-demand Companies discussed: LKNCY, KR, DPZ, PZZA, ABBV, EOLS Host: Dylan Lewis Guests: Bill Barker, Nick Sciple, Mary Long Producer: Mary Long Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

Dylan Lewis We're talking boba, groceries, and stuffed crust pizza. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Bill Barker. Bill, thanks for joining me today. Bill Barker Thanks for having me. Dylan Lewis We are all food all the time on today's show. I mean, those are the most fun shows that we get to do. We can talk about financials, we can talk about insurance, but it's most fun when we can really visualize what we're getting into on the show. A lot of stories

in that zone today. First one up might be a fun one because it gets us outside the U.S. There is a new, fresh name on the Hong Kong Stock Exchange, Mechoo. You might see it spelled M-I-X-U-E in headlines. It's a tea and ice cream fast food chain in China. Bill, I don't know about you, but my eyebrow went up when I saw the headline from CNN, this boba chain you've never heard of has more outlets than McDonald's. Yes, that is the headline. The other alternative to that headline is, it's got more outlets than Starbucks, which is not really possible, I think. What else do we know about it? It's got a snowman thing going on there. They play their theme on a loop in the stores, apparently.

I don't know how that works. But this is a very, very large, in terms of number of outlets and number of cups of boba tea and ice cream that it's serving. But it's also not really running the stores itself. It's franchising more or less everything. Yeah. We're getting up to speed on this one because it is not in our local market here, and so we're relying a lot on the reporting for this. It is known to be a budget-friendly chain in China. The strategy, the promise for customers is, you can eat and drink well for about $2. They are a competitive, very value-oriented chain. They lean very heavily on the franchise model, as you mentioned. We've seen that be very successful for a lot

of companies. It's interesting to invoke McDonald's in a comparison, because that is a model that they've harnessed. I think 90%-plus of their locations are franchises. They've been able to grow very, very quickly as a result of that. It's a little bit of a different approach. I think what I worry about when I see so much reliance on the franchise model is, what is the experience like store-to-store, and how reliable and consistent is this growth going to be? We're not going to be able to provide any answer to that without getting on a plane and going to Tier 2 and Tier 3 cities in China, which is primarily where these locations are. So, as much as it has grown and it's become bigger in terms of units in McDonald's

stores Starbucks in far less time. It is in China, so that gives you a lot of potential customers and it is serving a lot of those potential customers. The next place where the growth might take it is in a higher competition area. The Tier 1 cities, which are already occupied by favorite boba tea provisioners. That is what their next stage of growth is likely to be, as well as, internationally, there are 17, 18 different countries. There's lots of places still to expand, especially, as you point out, for such a low-cost provider. Are you proposing a field trip? It almost sounded like you were saying we should get on a plane together and do a little boots on the ground.

I'd be happy to do that. I've gone on less relevant business trips in my life. Not for this company, but elsewhere. I think that would not set a record. I would love a recurring segment, less relevant business trips with Bill Barker. I think that would be a fun time to explore your past lives working. Looking at the business, while the location counts are impressive and seemingly dwarf what we see with McDonald's and Starbucks, because of the value orientation and because and the markets they operate in, they are a fraction of the size of Starbucks or McDonald's when it comes to sales and when it comes to income. For as splashy a story as this is,

this is still, in the grand scheme of the businesses out there, not the biggest business even in China, not the biggest debut even, I think, on the Hong Kong Stock Exchange over the last couple of years. There's a lot to have to still go right for this business to reach the size of those more internationally known competitors. I imagine that there are probably some people that are listening to us talk about this bill and saying, I've heard you talk about companies with a similar story in China before, and Luckin Coffee comes to mind, where incredible growth story, a lot of investor excitement, but a lot of investors also got that burnt coffee taste in their mouth in 2020 when the accounting scandals came out. How do you think

about an opportunity like this and a company like this hitting the markets? Right now, I think of it as one that is best left in the too-hard pile. That is, given a few years of audited financials that you see, and then some quarterly and semi-annual reports, it's up 43% today on the IPO in Hong Kong, which is a sign of speculation, perhaps. But I think that you're right to point out that China is not known for only providing honest businesses. So, I think that the assumption is, this one is, it's huge, it would be very difficult to get to something approaching this size without being legitimate in all manner. But hey, give it a couple of years to keep an eye on it. We can't tell you that just

because it's got 45,000 stores, that means everything about it is a good investment idea. It's grown, it's still growing. That's part, but not everything in what you want in an investment. I guess, in some level of fairness to Luckin and the business outlook in China, there was a very rough period for that business. 90% fall in the March of 2020 due to accounting issues that they were systematically overstating their revenue and doing a lot of things behind the scenes to inflate their numbers. They have since gotten themselves right. I think the stock is well above where they debuted. I think it's still off highs. But the opportunity is there to meet the Chinese consumer with a lot of these businesses. It's just a matter

of whether all the other things are right for some of these companies as well. Yeah. China's been a good place to be starting investments this year, more based on AI news that's coming out of China and then what that's done for the biggest names in the tech space in China, more so than this right now. China's economy has got issues, but so do all the economies. I think that it's good that it is expanding outside of China. That's going to be some diversification that you would want, I think, to see in this investment. Bringing us back over stateside, Kroger CEO Rodney McMullin is stepping down from his leadership role at America's largest supermarket

chain. The company's board investigated issues around personal conduct, and that led to his departure. This is an interesting one, Bill. It doesn't seem to have anything to do with what the company is reporting, how it's operating, but personal conduct specifically. McMullin held the role of CEO for over a decade at this company. He has been at the company since the late 1970s. The conduct stuff aside, for the business, this feels like a pretty big set of shoes for someone to step in and fill. Yeah. He's been there for a long time. Of course, they were, I don't know, lucky. We'll see what happens with the outcome of the lawsuits regarding the attempt to acquire Albertsons, which was, according to Albertsons, not attempted hard

enough. And therefore, Kroger gets to be sued by Albertsons for the failure to get that deal closed. I mean, it was not approved by the government as antitrust issues. So, I think that it was a successful reign up until whatever he did, because we're not getting any details that I've seen yet. Personal conduct is what is quoted in the headlines. And in fact, in quotes in the headlines. I mean, why can't you just say he's out for personal conduct rather than he's out for quote, personal conduct, unquote? I mean, it just sounds that much more salacious. But we really don't know what the conduct was. It was personal. We get that. That's all we know. That's what we know. Maybe that's all we're entitled to know. Maybe it's not our business what the personal

conduct was because it didn't relate to Kroger. It doesn't appear to have been an inappropriate relationship with another Kroger employee or executive. But it was also treated rather quickly. This came up, I think, to the attention of Kroger's board, I don't know, a week and a half ago? A week ago? It's possible that we may get some more commentary. We're certainly going to get some more questions about this, because Kroger is set to report earnings later this week. And so, company management is going to be in front of analysts presenting the business. I have to imagine that this is going to be one of the topics that pops up. In the interim, Ronald Sargent, one of the company's directors, is going to be stepping in as the CEO. And Kroger is in such

an interesting place as a business, because you mentioned the failed, they didn't try hard enough, Albertsons acquisition. I'm not saying they didn't try hard enough. I'm sorry. I'm quoting Albertsons here. Yes. Let me be very specific in my quotations. I have no idea how hard they tried. Okay. They are staring at a failed acquisition. They are also now looking at losing their longtime CEO. You would think concerns abound for a business like this, and yet, the stock is just off of all-time highs. There seems to be plenty of support and excitement for the business, despite the fact that things have not gone particularly well in the last

year or so. I think not acquiring Albertsons really was things going well. They made an offer when prices were high and it didn't get approved. Let's imagine that one of the reasons that it didn't get approved was that they saw that they had offered too much money for Albertsons and put in a 50% effort on trying to get it approved. I'm not saying that's the case, That's what Albertsons is saying. But certainly, that deal collapsing did not hurt the stock, as you point out. I think that's because the price being offered was the wrong price. I guess my question there, then, is, the major priorities and direction for this

business have been sideswiped over the last year or so. They had plans to become a much larger chain, a combined chain. We're not doing that anymore. We had a leadership vision that was set out by an executive who is on his way out, where do you feel like this business really needs to be focusing? And maybe where this new incoming CEO, whenever they choose one, needs to be focused? The things, I think, continuing what they have been doing. As we say, this is at an all-time high, more or less, within a couple of dollars. And it's down today on this news. So, I think to just be a steady hand, calming influence, everything's going great at the actual Kroger and the other brands that Kroger operates, rather than trying to reimagine

any part of the business. You've got to keep refreshing outlets, you've got to find the right locations. It's blocking and tackling stuff. I think, largely, when you're talking about something which is this thin a margin operation, if you're blocking and tackling better than the next guy, you're going to sell more groceries. That is going to be how you achieve the best return to shareholders. Our dessert for this food news breakdown, after decades of resisting, Domino's has finally caved to the stuffed crust pizza fans. The chain will be looking to win back some business, currently going to Pizza Hut and Papa John's for those who really enjoy that cheesy stuffed crust pizza. I don't know about you,

but I saw this quote from management, and it took me a little bit by surprise. Nearly 13 million Domino's customers each year are buying Stuffed Crust pizza from competitors. These are customers who leave our brand. Bill, I don't have a child in my life, I'm not a parent. I haven't had a Stuffed Crust pizza in a very long time. Have you? No, never have. You've never had one? No. Is that a hill you will die on, or are you willing to try one? I actually don't, within the context of pizza, this won't make too much sense, but I'm not that into cheese. I think crust

is awfully good without cheese in it. How would, from my perspective, it be improved by suffocating it with cheese? I guess people that really love cheese would disagree with you. Yes. But we're talking about me and whether I've eaten it. I'm not blaming anybody else for enjoying cheese. So, you are not one of the 13 million who have been buying from elsewhere, it sounds like. You maybe weren't even buying from Domino's to begin with, if you're not a fan of cheese. You know, I don't check the credit cards as closely as I should about what the kids put on them sometimes, so I wouldn't doubt that I've paid for a stuffed crust pizza somewhere

along the way. We're having some fun with this one, but I think one of the things that was kind of interesting to me looking at this was, the development process for this was three years long. And we look at so much of the menu innovation. We've seen some chains do such a great job of this. Taco Bell, in particular, really comes to mind. It's a great reminder of how something seemingly so simple, you can go get a stuffed crust pizza in the frozen section of your grocery store. But for a chain to roll out something like this in a large-scaled way takes a ton of R&D time behind the scenes. Actually, one of the big

concerns that Domino's had for a long time in bringing this out there was the effect it would have on throughput. And it seems to me like they've basically said, we got to meet the customer here, even if it means we're not quite going to be at the speed we normally would be with our pizzas. Yeah, this is not an example of Silicon Valley-esque run fast and break things approach to how to get something out on the market. Just get it out there. It's a 1.0. It'll be good six months from now, but just get it out there. So, that is not as viable a thing to do with, as you state, their operation 7,000 units, I think, for Domino's, and to roll it all out, to make it available everywhere.

You're going to start advertising campaigns around this, so people are going to be ordering it online. You've got to be able to order pretty much, I guess, from all the units. So, yeah, a lot of meticulous planning going into this three years' worth does strike, I think you, definitely strikes me as a lot of time to do this, especially because this is an innovation, and imagine me saying that word with air quotes around it, that has a 30-year history, right? Isn't that when Pizza Hut first did? Yeah, they've been doing this for a while. Yeah. No, everybody does it, right? Everybody does it. Papa John's and Little Caesars and everybody but Domino's. Domino's

has done very well as a stock for the last 20 years. This is not exactly kneecap them, but this is an incremental growth opportunity if, as you point out, it is done in a way that does not negatively affect throughput. I love that this has been someone's job for three years, is to be focused on stuffed crust pizza. If they needed a taste tester, Would you be capable of taste-testing pizza for three years with your not-so-fondness for cheese? I mean, I could eat a lot of pizza. It's just like, when you add more cheese than the amount that I particularly want on it, then I'm going to eat less.

No, that sounds like a decent job. I've had worse jobs than that. Coming back to my career, I've had worse jobs than pizza tasting. Worse jobs and less relevant business trips. Haven't we all had a worse job than pizza tasting at some point? No, that's as good as it gets. And Bill, you're as good as it gets. Thanks for joining me today.

Thanks for having me. Coming up, have you seen a med spa in your neighborhood? Mary Long caught up with TMF Senior Analyst Nick Seipel to find out why the industry is booming and one company that's selling a few products that can help you look a little younger. Businessweek reporter Amanda Moll had a fascinating story out the other week about America's med spa boom. Nick, this is something that I've been following and interested in for a while, but Amanda highlighted the business perspective of this. For anyone unfamiliar, med spa is short for medical spa. It's basically a hybrid between a doctor's office and a salon.

it's a place where you can go to get Botox, to get lip filler. You can get something called CoolSculpting, which is a non-surgical procedure that freezes and destroys fat. You can get hair removal, IV drips if you had a little bit too much to drink the night before. In some places, you can get hormone therapy, and increasingly, you can get access to compounded GLP-1 drugs. Nick, I wanted to talk to you about this because you and I have had some conversations recently about investing in highly regulated industries, such as nicotine. The hair salon piece of this is innocuous enough, but it's the medical part of that med spa equation that is interesting to me. What does regulation look like in this hybrid salon slash doctor's office med spa space?

If you look at it, med spa has really been a booming industry. You'll get some numbers we'll talk about later. But really, regulation falls between a traditional doctor's office and one of these, a traditional spa. Generally, the med spa will need to have either be owned by a medical doctor or another medical professional, or you can have a medical professional act as a medical director of the facility. The injectors, the folks actually injecting things like Botox and filler products, tends to need medical licensing to perform procedures. However, the general training required is pretty low, and that barrier to entry to enter the med spa business, plus just the incredible demand we've seen for all those underlying products you listed out is part of

why we're seeing such massive growth in the business. You talk about incredible demand, and I'll put some numbers behind that. Between 2010 and 2023, the med spa industry grew sixfold. There are now more than 10,000 med spa locations across the United States. Average annual revenue per spa is just shy of $1.5 million. That's more than doubled in that same 2010-2023 period. In 2023, med spas as a whole were a $15 billion business, and analyses show that the industry will expand by 15% per year moving forward. Most of these med spas are privately owned, though there is an increasing interest among private equity types in investing in and rolling up these businesses, kind of like we've seen happen with vets and dentists, etc.

What might a public markets investor do with all this information about the seemingly booming med spa industry. Limited opportunities to invest directly in the med spa business as you laid out, many of these privately held. However, lots of opportunities to invest in the products that these injectors are selling. A little over two-thirds of that $15 billion market you mentioned is driven by dermal fillers like Juvederm and Restylane, and also neurotoxins like Botox, which we'll talk about later. Those are continuing to grow in high single digits, low double-digit rates, and should grow for years to come. They're really the staple products of these businesses to the extent you've got the sales force growing rapidly year over year.

should help pull through product sales for those underlying products. So, Botox is probably the name that is most familiar to listeners. AbbVie is the pharmaceutical company that owns Botox. But AbbVie's got a lot of other products in its portfolio. So, perhaps a more direct way to play into this trend of injections and neurotoxins and fillers would be to look at Evalis, which is a, quote, performance beauty company. It's got a specialization in medical aesthetic products. Its flagship product is a competitor to Botox. It's called Juveau. From a consumer standpoint, what is the difference between Juveau and Botox? For the person receiving the injection, not really significant difference at all. In terms

of efficacy, there's no statistically significant difference between Juveau and Botox. That's been proved in head-to-head trials. For the injector, though, who you could argue is the customer here, The Jouveau is significantly more profitable. We talk about Evalis as a cash pay focus model, allows them a little bit more flexibility in pricing relative to other folks on the market, allows Evalis to participate in co-branded marketing with those injectors. All that translates to a neurotoxin product, Jouveau, that gives the end user very similar results as you get from Botox, but for the injector, is significantly more profitable. You mentioned Evalis' cash pay business model. This is something that the company

calls it unique. Why exactly does that matter to folks who might be interested in investing in this business? Well, it gives Avalos a lot more flexibility than its competitors because it isn't subject to the same type of red tape and regulation that other folks have to deal with as folks who sell a product that is both used for aesthetic and for medical purposes. Botox, for example, is also used for medical procedures like migraine treatments. Because they take insurance dollars, you're not allowed to charge cash payers a lower price than what you charge the insurance payer, so folks who might be using this for medical purpose. Because Jouveau does not receive reimbursement from insurers, Evelis can be a lot more flexible than its competitors

in marketing and pricing, which makes Jouveau more attractive and profitable for cosmetic injectors. Also allows them to be more aggressive in how they market to the injectors, co-branded marketing, those sorts of things. For the customer, for the med spa, it can be significantly more profitable. Most of these med spas, worth mentioning, are cash pay businesses. Evelis calls itself a performance beauty company. I do not know exactly what that means. What is performance beauty, Nick? Well, we're really talking about neurotoxins and fillers. Today, Evelis is a single-product company, Juveau, again, an analog to Botox and Dysport, the other large neurotoxin businesses. However, in the second

quarter, going to enter the filler market with their brand Esteem. They're really talking about injectable beauty products that are used exclusively for aesthetic purposes to make you prettier. So just to be clear, I'll take a moment to kind of zoom out and distinguish what a filler is versus a neurotoxin. So Juvo and Botox are neurotoxins, and they work to stop movement and basically prevent wrinkles. Dermal fillers work a bit differently. The neurotoxins, they're used to restore facial volume, so to plump lips, to plump cheeks, that kind of thing. Let's talk for a moment about, okay, we've mentioned that Evalis has this Botox competitor, Juveau. They're also working on rolling out another product, Evalis, to distinguish between

the name Evalis. What exactly is the growth potential there with Evalis in the dermal filler market? If you look at Evalis, they think that the addition of the filler will expand their addressable market by 78% to $6 billion. If you look at the company's long-term guidance by 2028, planning to reach $700 million in net revenue and non-GAAP operating margin of at least 20%, that'd be about a 28% compound annual growth rate over that time period. Interesting, worth noting, Jouveau can match the performance of Botox out there in the market. Because of Evalis' differentiated go-to-market strategy, it's really been able to capture share very quickly. With this Evalis filler product, on top of that business model differentiation

that Evalis brings here, in the filler product, Evalis, it has shown statistical superiority to Galderma's Restylane product, another one of the leading fillers out there on the market. Now, you've got a product with a differentiated go-to-market strategy. You've already scaled up your sales force to support Jouveau. You're layering in a filler product that is already going to expand your addressable market significantly, and it's statistically superior the other products out there on the market. So, lots of synergies for the existing business, and I think it's really going to drive significant growth moving forward for Evelis. You talk about different go-to-market strategies and how these products go out to the injectors

themselves and are marketed to those injectors. Botox cosmetic sales grew only by low single digits throughout 2024. Meanwhile, you've got Juvo sales growing 30% year-over-year in the most recent quarter. Is this a story about Juvo gaining popularity and gaining market share or Botox losing it? Because a lot of this feels like a marketing story to me. How can investors today gauge the future success of AbbVie or Evalys or some other competitor based on that company's current marketing efforts? Sure. If you look at Botox, they did have a few points of market share erosion during 2024. However, still the market-leading product about mid-60s when it comes to market share. They did, AbbVie, reduce their long-term

guidance for Botox from low double digits down to high single digits. I think there's a few things going on there. First, obviously, competitive intensity increasing with Evelis, other folks going into the market. You have other neurotoxins that have also entered the market over the past couple of years. That has maybe crimped the potential growth for Botox, though it remains the market leader. Also, you have to think about the customer. People don't have an infinite beauty budget. I'm sure you're familiar with the GLP-1 trend that we've seen progressing over the past year-plus. Those drugs are quite expensive. To the extent that you see folks having a limited budget and subbing in GLP-1s into their beauty or their overall regimen, a little bit less cash

available for spending on Botox or some of these other neurotoxins. I think the slowdown in sales that you're seeing from Botox is largely increased competitive intensity and also customers are spending on other products out there in the market. Long-term, though, still expect to see the market grow high single digits, low double digits. What you really want to pay attention to to see how the individual competitors are trending over time is, again, those market share numbers. I was really excited to see Evalyst post-launch get up to that double-digit market share. And if they can continue to take share over time, I think that'd be a good story for the business. But even if share remains stable, the underlying industry

should grow for many years to come. If you only use products it'd personally recommend to friends like you. For the team, I'm Dylan Lewis signing off. We'll be back tomorrow.