Motley Fool Hidden Gems Investing - Pet Parents Keep Spending

Episode Date: December 7, 2023

Chewy’s growth depends on how much we love our furry friends. (00:21) Bill Barker and Deidre Woollard discuss: - The power of Chewy’s auto-ship service. - If Chewy’s growth is too dependent on macro trends. - What factors could lead to a Dollar General turnaround. (21:38) Mary Long talks with Dexcom CEO Kevin Sayer about the impact of weight-loss drugs on diabetes care. Companies discussed: DXCM, DG, CHWY, DLTR, AMZN, WMT Claim your dividend report here: www.fool.com/dividends Host: Deidre Woollard Guests: Kevin Sayer, Mary Long, Bill Barker Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

You gotta try breakfast at A&W. You gotta try breakfast at A&W. And what better way than with a delicious Pret Organic Coffee, starting at just $1 all day, every day, now until December 31st. You gotta try breakfast at A&W. At participating A&W locations in Ontario. Are you giving your pets gifts for the holidays? You're not alone. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Bill

Barker. Bill, how's it going today? It's going well, thanks. Glad to hear it. Well, yesterday on the show, Dylan and Bill Mann, I believe, talked about people food. We're going to start with talking about pet food with Chewy Earnings. Bill, I got to ask you, I know you have pets. I believe you have a dog. Are you a Chewy subscriber? I think I've seen some people rave about their Chewy's experience, but I get food delivered regularly by Amazon and haven't ever given it a thought as to why it would change.

Do you have a subscription with Amazon, or do you just buy food when the bowl is empty? There's a subscription for some of the food, and other parts of the food are when the bowl is empty. One of the dogs is on prescription food right now, so I can't just get that as easily as otherwise. But it's a problem for Chewy is that there aren't enough people like me thinking about getting multiple dogs out there. They need more customers, it seems like. I think so. Well, it's interesting, because you get the subscription, but you get it through Amazon. And Autoship is huge for Chewy, too. It's about 76% of their business, according to their earnings. And I find that interesting, because I have a cat who's also on prescription food and

also gets prescription medicine because he's itchy. And so we have Chewy for the medicine, but not for the food, which is, you know, the medicine is a big part of Chewy's business as well. Seems like a bigger part, but you're right. The earnings were, they weren't great. I mean, the customer count was down by 1%. That's not great. You know, I mean, this is sort of a pandemic, darling. But what impressed me was how much money everybody continues to spend. Net sales of $543 per customer up year over year by around 14%. So they're trying to grow customers, but they also are trying to keep people spending. Some of that is the pharmacy part. But are they putting too much faith in how much we love our pets? I don't know if you've seen

those commercials that Shuey's been running, but they make it seem like we are just ready to spend everything on our animals. I guess if they're betting on an increased trend in what is termed in some places, pet humanization, then that's one way to go. They are going to run into a limit on that. Before running into a limit, I think, on the possibility of acquiring more customers pointed out that there was a COVID darling. I think a lot of the growth was pulled forward. There was an interpretation of the mass adoption of pets as something that was the beginning of an extended period of growth in the pet markets rather than just a pulling forward of future growth. The stock price reflected that in 2021 and not ever since.

is a stock that's been clobbered as reality has been delivered rather than the fantasy that was hoped for by not just owners of this stock, but a lot of others that saw changes in behavior over a short period rather than fundamental changes in behavior over a longer period. Yeah, that is one of the things that I'm asking myself about this stock as well. This one and the one we'll talk about later, not a good year for either. But one of the things I mentioned on the call was really strong Black Friday and Cyber Monday. It's gone down now since then. But this thing about people buying pets gifts, do you buy your dogs gifts? No. There have been some impulse purchases at times, but I've been asked by the kids,

it's so-and-so's birthday. What are you getting her? And I just take the cat, the dog. They don't know anything about that. They just want a little more food. That's what they really want. But certainly, the opportunity to buy costumes at Halloween for your pet is a thing. It doesn't seem to be a thing that the pets want, but a lot of these gifts are things that the people want more than the pets want well chewy's kind of betting on this idea of of pet parents you know or paw parents depending on on who you talk to with this idea that you really you treat your your pet your pet is family and you have to treat them like family which i don't know i mean i mean i love my cat but i'm not i'm not sure i consider myself my my cat's parent uh you know with looking

at chewy you know tough year in the market as we've mentioned part of that losses this is what the market really didn't like. And they're still a really young company. They're still growing. They're expanding into Canada. They're working on streamlining all of their shipping and things like that. I'm wondering, do you think the market has less tolerance for a company that isn't a tech company? Because losses seem to hurt more if you're not making software, from what I can tell. Well, if you're not growing that fast and you're losing money, that's a bad combination. Always has been. You can defer the making money while the growth is exceptional. But when the growth becomes something that you can measure against lots and lots of other things

and ones that are making money, you suffer by comparison. So, when you depart the category of 20%, 30%, whatever it might be, annual growth, and you wander into high single-digit, very, very low double-digit, which is, I think, about as high as you might rationally predict for Chewy at this point, then the question turns to how does that stack up in terms of profits? Poorly is the answer today. Sadly, yes. Then you're, well, who are the most likely buyers and owners of the stock? It's people who buy the story and either have unshakable faith in management or think there's a hiccup going on or something like that, but you're

getting into fewer and fewer buyers when you don't have either strong growth or any profitability. Now, there's future profitability, I suppose, in this company if it focuses on that, but it's still saying that it's a good growth story. Yeah. That, I think, is the interesting thing is that it was maybe being seen as less of what it is, which is e-commerce and seeing it more as some new type of company. And the question I'm asking myself about it is, were the expectations too big? Because I think we've seen that with a lot of the pandemic darlings, is that they had growth and we just thought, oh, the sky's the limit. And then we sort of came back to reality. it's like, maybe this is a smaller business than, than we thought. You know, you mentioned earlier

the idea of like, people need more, people need to be getting more pets. I mean, that's one of the issues that, that is, is happening. Adoption rates are down. You know, we're not, we're not getting as many pets as we did when we were all home during the pandemic. And one of the things that I think about with this company is, is macro pressures, right? So you've got the pressure of people probably will continue to spend on their pets, maybe spend a little less, you know, that, that's a concern. The other one that I think about, which is off to the side, but the idea of household formation. My theory is, if rents are more expensive, maybe people are living at home longer, maybe they're not going out on their own, and then maybe you won't get pets.

With all of this stuff, is Chewy just a smaller business maybe than the market really wanted it to be? Oh, certainly than what the market wanted it to be back when the stock was 5X, 6X what it is today. The growth was understood to be a function of that real step up during the pandemic and then just stretched out as people would maintain their pets and get more insurance for them and the pets would age and they'd have more prescription medicine and everything. There were many new pet owners and they would become lifelong pet owners. Well, some of that has played out. The pet market is bigger today than it was in 2019, but it's still digesting a lot of people that

aren't going to turn out to be longer-term or lifelong pet owners, or because they don't have the choice to work from home, can't maintain their pet the way they had or the way the pet wants to be cared for. I think there's continued digestion of the growth that occurred. For a company that was in the high growth category, that's a difficult thing to navigate. Yeah, true. But the thing I do love about this is those auto ship numbers. I mean, I think that's a great thing to keep watching for this company. And as long as they keep having that and they keep growing spend, hopefully they sort out some of the other stuff and learn to cut costs a little bit. People will continue to receive

the food, and the food will continue to get eaten, and it is convenient to have the auto a ship. It's like a subscription. It is a subscription. So, that is a more stable source of revenue than otherwise. But, as the numbers this quarter showed, that's not enough to produce the top-line growth that the stock needed. Yeah. I want to pivot and talk about another company that reported earnings, which which is Dollar General. It has not been a great year for them, either not in the market or certainly in the court of public opinion. There was a Bloomberg cover story in September about Dollar General employees saying it's a terrible place to work. But I started getting interested

in this one kind of after that. I've read that story. Not, you know, not great, not a great look for them. But then, you know, they brought back their CEO, the former CEO, Todd Bassos, in October. were. I'm starting to look at this one as a turnaround. One of the things that they announced, not on this call, but before that, was that they're investing $150 million in labor hours. So they're focused more on the stores, on addressing some of those customer service problems, some of the issues with strength that they've had. So in general, you've got a CEO coming back. How long do you give them? Is it like a new CEO where you say, okay, it's got to be a full year. But if you've got a CEO coming back, they already know the company. Do you want to

see action and results a little sooner? Yeah. Well, I think one of the things you're going to see, and you saw it perhaps already, is the big bath quarter, where you put a lot of the bad stuff into your first quarter, maybe two quarters of results for the CEO. know, some charges, sort of assess what you can put into the past and put it into one big bundle, and then start talking about the future. And I think that certainly with a returning CEO, he's going to be much more tuned to exactly where the bodies are buried for this company and a very detailed knowledge of what does and doesn't work, not only in the industry generally, but with the company specifically. It's not a function of a company

that needs, I think, a new pair of eyes to look at it. An old pair of eyes had great success. Left at the right time, perhaps, but you only have to go back a year to have the stock double the price that it is today. Prior to this last 12 months, it was a fairly smooth 15 years for the company. I think that the odds in the market, with markets betting on is a return to the past. And that's a pretty good story for shareholders. Whether it develops, as you say, that's a question how much time you should give. And I would say, just a couple of quarters, you'll see something. Yeah. I think what you just mentioned is why I'm interested in this one, because it was a good performer. It's a good dividend. It's been a

good stock, and then it's had this bad year. And now it seems maybe this is like their Domino's pizza moment where they admit that, hey, there's a problem. But I think one of the things that's interesting for them, so not a great quarter, same store sales down a little bit, but they're putting a lot of their energy into growth. So maybe this is part of that get all the cost stuff out of the way, because their real estate plans are ambitious. 800 new stores, about 1,500 remodels. You know, you think sometimes as a CEO comes in, they want to, you know, trim costs, trims the sales. This is the opposite approach. And I'm wondering if that is because, I mean, Dollar General, the dollar stores, they kind of have this captive audience. So I think maybe

they figure they increase, you know, get more people in the stores, increase quality, maybe they increase sales. Is that something we should be looking at as part of the thesis here? Well, the growth here has to be put into context. 800 stores, I think they've got 15,000, 17,000 right now. Yeah, they've got a lot of stores. If you talk about the dollar stores in general for the category, they're 37,000. To put that into a bit of a pointless context, you could visit one every day for 100 years and not have yet visited them all. If that were a worthwhile thing to do with your next 100 years, I've given you that idea. So, there are plenty of them out there.

800 more isn't really as big a number as you might think, given the installed store base already and the availability of them. But there are probably 800 reasonable locations. And when you map that out over a few years, I think the remodeling is also a big part of this. And I wouldn't doubt that there are well more than 1,500 stores that look like they could use a little remodeling out of the entire account. So, I think they've got plenty to do. They've got to get by these OSHA reports and the employee safety problems and fines that they have accumulated over the years and have been back in the news this year. You know what you're getting when you go into a Dollar General, but they can up the experience

if they choose to use their money that way. And they've, I think, discontinued their share buybacks, so they've got some more money available to dedicate to that, up to a point, which is up to the point at which the debt becomes a problem, because this is a company that has plenty of debt. Yeah, that's a good point. When you're assessing this as a potential turnaround, there's just a lot of factors. I'm thinking about the dollar stores in general a lot lately, because I'm thinking about consumer behavior, shifting consumer behavior, what, what could be next? You know, we've, we've talked so much about consumer spending. I find it interesting looking at Dollar Tree versus Dollar General because they're sort of, they're both dollar stores,

but you've got kind of a different, you've got a different product mix and Dollar General is so much more tied to the grocery side of things. And they're really, they're really on more in rural areas. So, Dollar Tree is starting to think like, okay, moving beyond the dollar, more expensive items. Dollar General, they're doing something different. They're putting in these DG markets, Dollar General markets, more fresh food. Looks sort of like a grocery store, but like a very small grocery store. So, when you're thinking about Dollar General, what do you think about as its role kind of in the consumer spending cycle? I think more and more embedded with the consumables and the refrigerated installations,

the food that has to be refrigerated that they're selling, they're moving more toward consumer spending that does not change over time and is not particularly vulnerable to macroeconomic factors. People are going to come in frequently for their consumables. They're putting in more produce, which will bring people in more often because that's something you buy more frequently. I think it's a good plan to get people in more frequently, give them what they need most, and layer on some impulse purchases beyond that. It's very competitive. They don't have a moat. It's extremely easy wherever there's competition, and although in some rural communities are the go-to place, in many others of any greater population size or growing population, there's

going to be competition, not just from Family Dollar, Dollar Tree, or Walmart, or significantly larger locations, but there's only so much you can capture before the online sales are also a threat. Their normal purchase is, I think, less than or around $15 per basket. That's not something that people are most frequently getting done online. How much they can grow that basket size without finding that they're running into competition from other and bigger players, I don't know. I think that's a bit of a cap. But everything up until about 12 months ago was generally successful for this company. They had, as I say, a good, more than decade-long, fairly smooth story that people would love to see repeated.

Well, I feel like both of the companies we talked about today are ones that we're going to want to see next quarter because things have to go in a direction at least. Thanks for your time today, Bill. Okay. Thank you. If you're a regular Motley Fool Money listener, you're probably well aware of how dividend stocks have the potential to really supercharge your portfolio's return. Dividends have accounted for around 40% of the total return of the S&P 500 since 1930.

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about these new drugs. Up next, Mary Long talks with Kevin Sayre, CEO of Dexcom, about the future of diabetes care and the small monitor that's changing what that care looks like. Maybe we can start by having you give us an overview of the history of diabetes care and how Dexcom came to really be a pioneer in continuous glucose monitoring. Great question. I personally go back in diabetes care back to the mid-90s. I started my time in diabetes at MiniMed Diabetes, which Medtronic bought and is their diabetes arm right now. With diabetes care, particularly those on insulin, there's always been several problems that need to be solved.

Insulin was the first big one. What a great discovery that was. Then how's that insulin delivered? and more importantly, what information do people use to manage their diabetes health and figure out how much insulin to deliver. Over time, the way people did that in the beginning was like urine sticks, and then finger sticks where people would prick their finger, and you would prick your finger and get a number and say,

okay, based on that, this is how much insulin I'm going to take or what I'm going to do, which is kind of like watching a basketball game and looking at the score in the middle of the first quarter and deciding who's going to win. You know, it doesn't work that way. And I experienced the vision or the experience of continuous glucose monitoring way back in the 90s when I was there and then had the chance to come to Dexcom. But quite honestly, the most difficult problem to solve in intensive insulin therapy

is what is the information I'm going to base that decision on. So what continuous glucose monitoring gives individuals is the opportunity to look at their glucose all the time. And our numbers go directly to your phone. We want to meet people where they are. They get a new glucose value every five minutes. And then we have alerts and alarms and system features that literally enable them to be safe and more healthy than they would ever be without it. And we've gone from a position, particularly with insulin users, way back in the day.

I've been at Dexcom now for 12 years full-time. It took a long time to get somebody to get CGM. where now we're covered by all major insurance companies. We're the most affordable, reimbursed solution there is for glucose monitoring. And most kids, if they get diagnosed with type 1 diabetes now or an insulin, they leave with the Dexcom on. They're not going through what everybody went through in the past. So this has evolved to really become the standard of care there. And we believe we have a lot more runway in other areas going forward. So that evolution that you mentioned, I've heard you say before that part of what Dexcom is and has been doing is really building

an entirely new industry. Can you explain a bit what you might mean by that? Yeah. And again, I'll go back to the beginning. In the beginning, insurance companies really didn't even want to pay for this because it looked like we're adding more costs to the system. So, we had to go create models to whereby we could get this reimbursed for people to use. We decided as a company that we wanted to take this technology to the phone. We were the first medical device of this nature, of this classification, to go directly to a phone. When we went to a phone, all sorts of windows opened up because we enabled people to, for example, to share data with others. We rang the NASDAQ bell a couple weeks ago, and I talked to one of our – we had a lot of what we call our Dexcom warriors there,

people who represent our company, who use our product. One was a young woman who told me a story. She's from Australia. She was asleep in a hotel room at four o'clock in the morning when people broke down her door because her blood glucose had gone low. Her friend in Australia had seen it because she followed the data on the phone, called the hotel, and saved her life. We've created situations and things of that nature to help people in their care. We've also created an industry with respect to interoperability. We share our data with other companies. We enable insulin pumps and algorithm companies to have automated insulin delivery to give people better lives. And we share our data with apps, with companies, nutrition-based,

diabetes care-based, whatever. If our data can make somebody healthier, we want people to use our data where they can. And most every first in our industry has been created by our company. Dexcom is not the only company that makes a CGM device. Your chief rivals are Abbott, which makes the Freestyle Libre, and Medtronic. Those are both large, diversified medical device companies. Dexcom does Dexcom. End of story. How does that singular focus help you and hurt you? Well, I consider it an asset primarily, but let me talk about how it helps us first. That singular focus means we have to be extremely clever and innovative. And that list of firsts I came at you with earlier, going to the phone first, the first interoperable system,

and our level of accuracy and performance, the reimbursement we've obtained, we have to lead this industry. We can't follow the other guys, so we have. we've always prided ourselves on having the best product, and that has given us a tremendous advantage over time with respect to accuracy and performance. Where it's difficult, and the things I think about when I think about our competitors quite candidly is infrastructure. As we look at new geographies to go into, for example, we don't have a cardiovascular business in Bulgaria or pick a country. We have to very selectively pick where we're going to make investments and how we're going to grow international in these other geographies

because we don't have other businesses there. We have grown very methodically, very thoughtfully, very creatively over time internationally and scaled our business that way. It's lack of infrastructure, but we've built it nicely. We more than doubled the number of employees that we have in the past three years, for example, as we built infrastructure out again while growing profitably. The latest iteration generation of your CGM device is the G7, and that launched earlier this year. That rollout happened all around the world at the same time. Seems like that was a success. You raised end-of-year guidance after posting your most recent results and are now targeting $3.575 to $3.6 billion in revenue, which is about a 23%

to 24% year-over-year growth. I'd imagine that there's a lot of planning that goes into that launch and also maybe a lot of chaos. What did you learn from that experience? And maybe what will you do differently when the G8 one day comes out? Well, we've learned a lot of things. And that's really a good question. Our G6 launch that happened five years earlier, we weren't ready for. We were literally running out of inventory almost on a monthly basis. If you ask my team, we were holding the business together. We're still growing well and we were doing fine, but it was really tough. We planned this launch much better from a supplier and a capacity perspective, and have had no product shortages whatsoever. We also matured our development

process enough to whereby we launched this product in a much more mature manner than other ones. You always have things you can improve when you launch a product, but I think the product was launched very maturely and in a very good state. The other thing we learned is about our technology in general people love our old product because it saves their life and it's been such an integral part of their care that while the other product is smaller and more accurate and reimbursed and affordable there's emotional difficulty sometimes in switching for people because again we've been front and center in their lives so we're we're switching uh people are switching out that are on the g6 system and g7 most of our g7 users are new to dexcom they they're not g6 switchers we've

been able to access a lot more physicians as far as prescription. 18,000 more physicians in the US have written Dexcom scripts than had written scripts a year ago because the new product has so many great features with respect to its smaller size, its ease of use. The new app is really strong and phenomenal. So I think the launch has been very successful. And with G8, I think what we've learned is, we'll just apply those learnings. Let's make sure the product is ready. Let's make sure it's baked. Let's make sure we identify the features that people need to put into it. I think we did a very good job of identifying what our users were going to want. Let's figure out what that next level of features is and build on that platform.

So, when you think about the future of Dexcom and future iterations of G7, G8, what have you, you seem to have a really close relationship with patients, with the consumers that use your products. How do you source feedback from them and then incorporate that into future iterations of this device? We continuously pulse our customers and ask for their feedback. We monitor social media very closely. The diabetes community is not quiet. They're pretty vocal. In fact, I got some great feedback when we were in New York ringing the bell. We had a dinner. We brought a lot of, again, our Dexcom warriors back. We had a luncheon forum. I sat at a table to get feedback from an 11-year-old, a 9-year-old, and a 7-year-old. And I said, okay, tell me what you

would have us do better. And it's really fun to ask the question. And they all had really good answers. They want us to make the product last longer. And we've committed to going from a 10-day product to a 15-day product over time. They talked about a couple things in the app they'd like to See, these kids, I mean, imagine being seven years old and having to manage taking shots every day or an insulin pump that's giving you insulin. When you ask a seven-year-old that question, you'd be shocked at the maturity of their answer. I'd like a different adhesive that does X, Y, and Z.

Okay, we can do that. So we ask directly, pulse directly. We spend time with social media. We also, again, you talked about us being a regulated company. we also have to recognize that whatever we do is regulated, and we have to make sure people are safe and it is a win. So, we balance all of that. Weight loss drugs have been a hot topic this year. And there are plenty of bears that are saying that this is going to change every industry, not just things that are seemingly

related to weight loss drugs, but even airlines are going to change their entire setup. Perhaps unsurprisingly, part of that conversation has involved diabetes companies and companies just like yours. And yet, again, you posted this amazing quarter most recently. And I think you've cited a study that says, well, actually, use of these GLP-1, these weight loss drugs, supplements and increases use of CGM products. Can you talk a bit about how you see the future of weight loss drugs interacting with your product? Yeah. And look, this drug category is amazing. The results that have been produced have been absolutely amazing. But there's never been a time when people wouldn't need CGM as a result of everything that's been learned.

The thing that we talked about was data that we've garnered through very strong data sources that people who go on these weight loss drugs, like people who have type 2 diabetes who are on basal insulin, if you add a GLP-1 to their therapy, if you add CGM, their outcomes are better. And the outcomes of these people all get better if you add CGM to those therapies across the board, if they're on intensive insulin therapy, basal insulin therapy, or just somebody with type 2 diabetes and you add a GLP-1 to what they're already doing, because it gives you a real-time scorecard. You learn throughout the course of a day, for example, if you're on one of these weight loss drugs, look, I can keep my glucose at a pretty steady state because I'm not

eating as much. You also learn very quickly, and a lot of us as executives of our company, we're sensors all the time without diabetes. You learn what specific meals do to your glucose and to your health. And so it definitely can create a better experience. It can also create better adherence to the drugs. One of the things the payers are concerned about in reimbursing for these drugs are the patient's going to comply. You can tell very quickly from a CGM if somebody's complying because you can see how steady their glucose is and how the spikes are not as big as they used to be before they were on these drugs. I think we can be a great scorecard for this. I think over time we can use the performance of our system combined with other data, such as

activity data, sleep data, whatever data we can incorporate into our data ecosystem and create an experience that can help people be healthier across the board. I never thought for a minute that these drugs would exclude CGM. I think we can become a vital part of it. We just have to define that, just like we've defined our place in the insulin-using world. Now, basal insulin, we'll define our place in this one, too. And I think we'll do very well. This kind of takes this a step further, but our co-founder, David Gardner, talks a lot about the importance of investing in companies that are building the future you'd like to see. And in so many ways, Dexcom is building a better future. But ultimately, CGM devices

manage diabetes rather than cure or eliminate it. So how does Dexcom fit into this futuristic world in which maybe diabetes doesn't exist? Well, type 1 diabetes isn't going to be affected by these drugs. There could be a cure someday. There are many programs where people are trying to get cures, and that'd be a tremendous outcome for everybody. Let's be very clear. But at the end of all this, you're going to need a scorecard, and people are going to need to see how healthy they are. And even, again, if type 2 diabetes is delayed, you learn so much from wearing a CGM. You learn more from wearing a CGM about your metabolic health than almost anything you can do. We believe we can create experiences that fit right along with all this. And if

somebody has prediabetes or, for example, gestational diabetes, we just got our pregnancy label. We can now be used in pregnancy. Well, you know, I have grandbabies that had a gestational diabetes. I have a gestational diabetes daughter-in-law and she was sticking her finger for the first couple of weeks. She called me up, can you give me one of those? It made night and day difference. And my twin grandbabies are here largely came when they needed to come because she wore a sensor. We have a place across this healthcare spectrum and glucose data is going to be important enough, but we'll figure out where to get it in. I think this noise will eventually quiet down and will be an important part of this community.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow. We'll be right back.