Motley Fool Hidden Gems Investing - Two Paths for Target

Episode Date: May 21, 2025

In one direction, there’s digital. In the other, there’s a treasure hunt. (00:21) David Meier and Mary Long discuss: - Target’s off-the-mark results. - Lessons from TJX Companies’ under-the-radar CEO. - What caused David to do a double-take when listening to Palo Alto’s earnings call. Then, (17:05), Morgan Housel joins Motley Fool Chief Investment Officer Andy Cross for a conversation about investment decisionmaking and the psychology of spending money. Companies discussed: TGT, TJX, WMT, PANW Host: Mary Long Guests: David Meier, Andy Cross, Morgan Housel Engineer: Dan Boyd Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, "TMF") do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. The retailers are in. You're listening to Motley Fool Money. I'm Mary Long, joined on this fine Wednesday morning by Mr. David Meyer. David, thanks for being here. Thank you for having me. Good to see you again. Good to see you, too. It's always good to see you. We're going to kick things off today with a look at some retailers that reported this morning. We'll start with Target. They saw comparable sales drop nearly 4%. Management lowered guidance for the full fiscal year, partially as a result. What else in these results stuck out to you, David? Yeah, I'm just going right back to the

second one that you talked about, which is the reduction in full-year sales growth. This is actually a pretty big deal. At the start of the year, first go-around, management said, hey, we think we're going to see top line growth of 1%. And now they say, hey, we're going to see a low single digit decline. So first of all, it's gone from up to down, which is never good. And it's also gone from a number that we're confident in to a range, right? A something. It's not as low single digit can mean almost anything. What that communicates to me is there's definitely some worry on the part of this management team. And then the other thing that stuck out was, despite the fact that the overall comp store sales growth dropped, the digital

business is performing well. It saw an increase of 4.7%. That's not necessarily surprising. This is a trend that we're seeing a lot of retailers, a lot of consumers find these services very useful. I know our household pretty much does not go into a brick and mortar store anymore. We get everything delivered to us almost. And so, it's not surprising to see that business doing well, even if it is still a very small part of the business. You mentioned that you're interpreting some worry on behalf of the management team. They actually put some reasons behind that worry. So, you've got CEO Brian Cornell blaming this larger, broader sales slump on a couple things, declining consumer confidence, tariffs, of course, and uncertainty about the future of

economy. You've also got the impact of boycotts targeting Target for its back and forth on DEI and corporate diversity policies. Notably, retail is a cyclical industry, and only one of these issues that Cornell names the DEI kerfuffle is actually Target-specific. Other retailers are dealing with consumer confidence issues, tariffs, uncertainty, etc. How heavily do you think these various headwinds impact the long-term target story? So, a very good question. I will start with the DEI kerfuffle, which is a great word, by the way, and say, I don't know how that's going to impact things going forward. It's in flux. And I don't think, based on what I've read, that the management has even tried to quantify it yet. So, it's there. Obviously, boycotts,

right? In either direction, not a good thing, but they are addressing it the best they can. So I don't know how long that headwind, uh, might last as for the rest. They are definitely near term headwinds. Consumer confidence is falling. Uh, this is, this is real and you're right. It, it, if it impacts everybody, tariffs are real uncertainty. Like, is it possible? What is the possibility that we could see a recession in the United States as a result of changing policies and changing consumer confidence. We don't know, but those risks are real. And again, you're right, across the board, everybody faces them. We'll continue to see, but it's very clear based on the guidance, the top line guidance that management is saying, we're seeing some

impact in our business specifically as a result of these conditions. Tariffs are real, but importantly, they haven't yet trickled down to affect in-store prices. Walmart said it would be raising prices in response to costs incurred by tariffs. Target's got a gross margin for the first quarter of about 28%. Considering that and the fact that its sales were already down this past quarter, what is Target's best move when it comes to tariffs, when they actually do hit in-store prices? Do you hold them steady? Do you raise prices? Do you absorb additional costs and let loose some sales to just get people in the door. If you were in Brian Cornell's shoes, what are you doing, David? Yeah. Another great question. Here's the thing. I think it has to

be handled on a case by case basis based on the sales data that they have associated with the products that are impacted. There's the, unfortunately, right. There's no single prescription about the best way to deal with these tariffs. It could be any of those things that you talked about, right? We could raise prices a little, maybe we could, you know, take a margin hit a little. Um, it depends on how quick, you know, how impactful that those sales can be. The other thing that they could do is they could actually try to find source, uh, substitute products, right? If, if this, Hey, like we can't sell this product, you know, above a certain price and it's not good for us to, um, eat the tariff, right. In terms of seeing a

margin reduction, let's go, we gotta go see if we can source it from somewhere else. So for just real quick for just a little context, management did say that about 30% of its products come from China. So, in the country which is getting the most headlines, 30%, that's actually not as high as I thought it might be. I was figuring it was maybe along the lines of 50%. But 30% is also impactful. Let's zoom out and think about the stock chart and Target's performance over the past five years. Because we're long-term investors, we like to think in these five, 10-year increments. Over the past five years, you've got the S&P 500 up nearly 100%. Target, by comparison, down by over 20%. What needs to happen for Target to buck the trend of the past

five years and actually outperform the S&P over the course of the next five? By the way, I love you calling it Target. When my parents lived in the state of Washington, we used to call it Target Nord. So it was the Target that was north of the city of Seattle. Anyway, I think the prescription is unfortunately very simple, but very difficult to execute. And that is Target has to get the right merchandise at the right price for the right customers. Essentially, that's what retailing is, right? That's all they ever want to do. Interestingly, one of the things that it's actually doing right now and plans to invest heavily into this is to try to become more efficient across every facet of its business. That's something that every retailer tries to do

in terms of continuous improvement, but they realize, hey, we have to step up our efforts here. The other thing that it needs to do is continue to lean into the digital order and fulfillment capabilities. I think this is the wave of the future. We'll pivot to another retailer that's nicely outperformed the S&P in that same five-year timeframe. And that perhaps has done that because it has gotten right this holy grail of retail, this idea of getting the right merchandise in the right place at the right time. That company is TJX Companies. So, they're the parent to TJ Maxx, Marshalls, HomeGoods, Sierra, a number of other treasure hunt style discount stores. When it comes to discretionary items, I would argue that this is the company that is really

a direct competitor to Target. A lot of people, I feel like, like to make the comparison between Target and Walmart as these big retailers. But Target has a treasure hunt style feel to it when you do go into the brick and mortar store. And TJX certainly has that in spades as well. All that said, yet in this most recent quarter, TJX saw comparable sales grow 5%. We talked earlier about Target seeing comparable sales decline. What's TJX got that Target doesn't. I think it's pretty simple right now. TJX companies have customers that want to and continue to come back to the store and do it frequently. On the conference call, and I believe this was for US TJ Maxx stores, they saw a 3% same-store sales increase, and that was entirely

driven by an increase in transactions. Let's think about that for one sec. That implies that maybe there was very little price increases. So, customers know that if they go there, they're still going to get the bargains that they intend to. They go in there with that intent, right? I'm getting a good product at a very good price that just may not be, quote-unquote, suitable for a department store. And as a result, they're deciding, hey, I will buy more things from TJX companies because they have what I want at the price that I want it at the time that I want, at that time that I need it. So yeah, it was an impressive quarter to say the least from TJX. I like comparing these two companies, Target and TJX, because I think it makes really clear

that Target's almost between two very different paths. One path is this digital sales e-commerce route that we've already talked about and that you've highlighted as potentially being the future for the company. But on the other hand, you have this treasure hunt style brick and mortar path that TJX has in a lot of ways perfected, that Target has elements of, but we're not seeing them being able to execute on that as much recently. So do you think the path forward is, hey, okay, Target, lean into the digital path? I do. I think there's one other thing that's a little difficult for Target right now, in contrast to TJX. Target has tried to differentiate itself by being, let's call it, a step up from Walmart. It's going after

a little bit of a higher demographic. If consumer confidence is waning, customers don't trade up. They trade down. TJX also is unfortunate right now, but they might have this little caught-in-the-middle type of problem as well, meaning their customers might not come in. The customers that used to serve very well might not be coming in as frequently because they're seeing, hey, I need to save some money, or I need to cut back on some spending. Maybe I don't need to buy everything I used to buy. And that usually means going someplace else. I'll continue down this comparison by taking a look at the two different leaders of these companies. So, Target CEO Brian Cornell, that's a name that tends to loom pretty large, get a lot

of attention in the business world. My sense is that far fewer people are familiar with the name Ernie Herman. He is the CEO of TJX. He has been since 2016. And yet, despite this distance in in fame and recognition, TJX under Herman's tenure has far outperformed Target's under Cornell's. Any advice that you think Mr. Cornell could stand to take from Mr. Herman? I think it's the idea of focusing hard on operations. Let's take a quick peek at TJX's margins. One of the things that they've been doing is steadily improving over the last five to seven years as sales have increased. I can't say the same thing is happening at Target. Those increases have led to increases in cash flow. That cash flow

gives the company, like TJX, options about where it wants to allocate that capital. It's opened new stores. It's been repurchasing shares when it thinks they're attractive. It's been growing its dividends. It's a little difficult, but TJX knows its niche. It knows how to operate it in its niche and it doesn't have the quote unquote mass appeal problem that target is trying to solve. And so I think it gets back to, Hey, you got to know who you are and you got to know, and you just have to be able to execute better than the, better than their competitors, which is exactly what TJX has done over the years. Yeah. Which as you've said, is a deceptively simple task, right? It's one thing to say that

difficult to execute on. We'll move on to Palo Alto Network. So totally separate from the retail industry. This is a cybersecurity company that, David, is very near and dear to your heart. I know they reported better than anticipated earnings and revenue for the last quarter. Sales growing 15% year over year, but net income falling by about $16 million or $0.02 a share. Wall Street seemingly not loving this as the stock is down about 6% last I checked this morning. You follow this company really closely, what in these results are you paying closest attention to? One reason I think that actually the stock is down is because there was maybe a little bit of worry about remaining performance obligations. Basically, these are, hey, think of it like the

backlog. These are contracts that we're signing. It came in a little bit lower than expectations. and, and there was, I'm sorry, the guidance was a little bit lower than analysts were expecting. Uh, so that might have a little bit to do with it, but I wasn't really, I will say this, I wasn't as paying as much attention to the, uh, the financials as I was to what the CEO was saying about, uh, AI, AI obviously been in the, in the news for every company. And the CEO said, Hey, um, data is massively important. Well, no, duh. We, we understand that, but Palo Alto has been shifting in that direction for the last few years. Um, it's why the company has really pushed for cloud-based services as opposed to on, on premise based services. And what's more, um, he mentioned

that when Palo Alto can see all of an enterprise's security-related data, it actually makes AI more impactful because it gets to train off of a larger data set, as opposed to looking at one segment within security, like identity security or mail security. And if you're trying to sell large enterprises on a one-stop shop solution, this is exactly what you need to be doing. So, I really appreciated the 10,000-foot level view that the CEO was giving. Management did not buy back any stock this quarter, though the CFO did underscore that the company's buyback strategy, quote, remains opportunistic. So, Palo Alto Networks is trading at about 12 times forward enterprise

value to sales. At what price would you, David Meyer, big fan of this company, consider the stock an opportunistic buyout? All right. So, quick editorial here. Yeah. I did a double take when I heard that. And I was like, wait, did I hear that correctly? So, I literally rewound it and I was like, you didn't buy back any shares? Your multiples were lower. Right now, the forward enterprise value to sales ratio is about 12. Earlier in the year, it was sitting at 10. That's significant. Now, there can be all sorts of reasons why, but I had to do the double take. And I would say this, based on the growth opportunities that Palo Alto has ahead, based on the technology innovations

that the company is investing in, that it's seeing in terms of the growth of its new products, I would think anything around 10 times forward sales would be reasonable. And obviously, the lower, the better. David Meyer, always a pleasure having you on. Thanks so much for joining us to chat about retailers and cybersecurity company today. Thanks for having me. Your summer travels deserve an upgrade. With select Chevrolet, Buick, GMC, and Cadillac vehicles connected by OnStar,

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Housel in a segment of a conversation that originally aired on our live stream, Fool 24. Morgan, you've written about reasonable being greater than rational. and the reasons we make silly or dumb investing mistakes, why do we do it? When you boil it down, all of your history, all of your experience, all your knowledge, what are the real reasons why we make not smart investing or money decisions, and how can we not do that going forward better? One thing that's hard about investing is it's one of the very few fields where the harder you try, the worse you are likely to do. That's the case for 95% of investors. The more effort you put into it, the worse you're going to do.

Why that's so hard for people is because most fields are not like that. If you want to get in better physical shape, go to the gym for more hours. If you want to get good at piano, practice piano for more hours. Most fields have a very high correlation between effort and results. Investing just doesn't. That is so counterintuitive for people. This is why some of the people who do the worst at investing are very educated, very intelligent, very high IQ people. Those are the ones who say, if I just try a little bit harder, if I just turn a couple more knobs and pull a few more levers, I should get better results. It's usually not the case. We're just having a diverse portfolio of good companies that you buy and hold onto forever.

It's so boring, it's so basic, but it absolutely works. It's not intellectually stimulating enough for people. I think investing is a dangerous place to be if you need it for intellectual stimulation. Now, I follow markets every day. I love reading about markets. But if you wake up every morning and you're like, what can I sell today? How can I tweak this and trade this and get ahead before earnings and react to the economic news? That's a very dangerous place for high IQ people to do that. So, that's one reason. The other is, nobody should pretend that saving for their retirement or their kid's education is not emotional. It absolutely is. I've never met any parent who was unemotional about their children's future. And so whenever you're making very big decisions

where the stakes are very high and there's a lot of uncertainty and there's also a lot of bad actors in the industry, of course, it's going to be a case where like people are not thinking about this fully with a fully rational, like mechanical mind. I've told this story before. I'm sure this is true for so many other people out there that when my wife and I were buying our first house 10 years ago, we found a house on Zillow and we're like, oh, that one looks pretty good. And we started driving to the open house and we're like, this is just information gathering. We're not doing anything big here. We're not making any decisions. We're just going to go check it out. And we pulled into the driveway and my wife goes, oh my God, I love it. And at that

point, all rational thinking was out the door. That was just pure emotion at that point. Because buying a house is not just a spreadsheet. You're thinking about Christmas morning with your children and barbecues with your friends. We shouldn't pretend that that is just a financial decision. It's not. A lot of investing is like that. Most investing revolves around retirement and putting your kids through college. Those are the two big buckets that drive the majority of investing decisions. Both of those are such major life decisions that it's hard for otherwise very calm, cool, rational people to make really calm, cool, rational decisions. Morgan, for analysts, one of my favorite stories with Warren Buffett is when someone

asked, how do I become a better analyst? I think I'm paraphrasing here. He said, read more annual reports. Where do I start? He said, we'll start with the A's and go all the way to the Z's. So clearly a gentleman who spent, as you said yourself, hours and hours, days and days, years and decades just doing what he's done. I think that is on the one side of the spectrum. That uniqueness is exceptionally rare. For most average people thinking about money and business, the parable you talk about, about trying, the harder you try, the worse you will perform. I think that's what you're speaking to. Really, everybody, but certainly, there are the rare people out there like Warren Buffett. Yeah. I think Buffett was less. I think

he actually does fit the mold of effort versus rewards. Yes, he was reading annual reports 24 hours a day for 80 years, but there were a lot of years where he would only make three or four investments. He was not emotional in the sense that he was waking up every morning reacting, oh, the Dow is down today, I need to go make a decision in my portfolio. Even though he was constantly immersing himself in this information, he was not getting emotional about it. The other thing that his biographer, Alice Schroeder, once talked about was, Buffett and Munger are or were not a-emotional, they were counter-emotional. When the market was melting down, they weren't unemotional about it, they got really excited about it.

it. They were absolutely giddy. Their focus would increase when the market was crashing. They were unique personalities. I think if you can be unemotional about things, that's better than being emotional about things. But when you're a supercharged investor is when you're counter-emotional about these things. Let's talk a little bit about your next book, which is called The Art of Spending Money. I think it publishes, as I mentioned before, in October. Share some insights into why you've thought writing the third book now in 2025, going through so many different periods of investing and money issues that we're facing today, but give a little preview of the book. Well, The Psychology of Money is mostly

about investing, which is a big part of what I liked and enjoyed and have studied for the last 20 years. But there are lots of people who invest, more than half of all Americans own stocks. But spending is something that is completely universal to everybody and just like in the psychology of money where even if you're a teenager novice or a seasoned hedge fund manager a lot of the behavioral learnings and lessons apply to everybody i think the same is true for spending whether you are on minimum wage or a billionaire a lot of the psychology of spending around envy and greed and getting people's attention attention seeking behavior wanting people to pay attention to you a lot of the behaviors of spending are universal no matter how much money you make

and so there are so many different stories to talk about in terms of the psychology of spending and i make the point in the first page of the book i'm not going to teach you how to spend or tell you how to spend because everybody's different like the spending that makes me happy might not make you happy and vice versa everyone's different but the behaviors around envy and greed and attention tend to be very universal across cultures across ages across incomes so it was cool to just take a step back and think about spending not from a lecturing point of view of like you stop buying lattes and and save more money and you know experience versus things that's all been tried that's that's that's been played out by many other writers but i just wanted to

look at the psychology of spending just like what's going on in your head when you make a decision with what to buy the house you buy the clothes you buy the car you buy the jewelry you buy the vacations that you take there's always more going on than just oh this is going to make make me happy. Some of the stuff will make you happy, but a lot of it, there's so much social signaling and social aspiration and you getting envious of other people and you hoping that other people are paying attention to you. It was cool to just take a deeper look at that psychology of spending. Was there any, was there any, any sneak peek that you can give us into something that was really, that you just learned that you, that was a surprise to you when you

were digging into how people are spending their money and how they're feeling about spending their money without giving the book away? Well, this is minor, but I love this little anecdote. I read the biography of Harvey Firestone from Firestone Tire. He was the tire magnet 120 years ago or so. And he wrote a biography, and he was very open about his life and his relationship with money. He was, of course, very, very rich, the equivalent of a multi-billionaire. And he had this diary entry that he included in his biography where he said, for reasons I don't understand, every single person who I know who gets rich buys a house that is way too big for them that they end up hating. And this giant mansion that they buy is

just an enormous liability. It's such a pain in the butt to take care of. It's way too big. They don't like it, but they all still do it. Every single one of them does it. And he said, I don't understand why. And he says, every single person who I know who's rich, they buy a mansion and they were happier in the smaller house. They hate the mansion, but they all do it and they refuse to give it up. And he makes this point that it's like, there's such a strong pull to show off your wealth, even when it makes your life worse off. And he, and he goes into detail about why he thinks that is, but I thought that was such a, like a refreshing statement. Cause I think it's true for a lot of people that a lot of wealthy people, you can define wealth, however you want, start buying

toys and cars and clothes and taking vacations that may or may not make them happier and actually might make them less happy. That what they actually want is a simple life, like a life that's simple so that they can enjoy being who they are and spending time with people that they enjoy. But there's such a strong social pull to make a complicated life with big, fancy, expensive things that might actually leave you worse off. disclosure, please check out our show notes. For the Motley Fool Money team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.