Motley Fool Hidden Gems Investing - Two Sides of Retail

Episode Date: August 16, 2023

Cava delivers some spicy results in its first earnings report and Target and TJX are on the opposite sides of retail trends.  (00:21) Jason Moser and Dylan Lewis discuss: - Cava’s stellar first earnings report, and how store count, traffic, and prices are all pushing the company forward. - How Target is being bitten by slowing consumer spend in high-ticket items and increased focus on essential items.  - Why TJX is happy to see inventory issues in retail and how the company continues to thrive in a tough environment.  Companies discussed: TGT, TJX, CAVA, WMT Host: Dylan Lewis Guests: Jason Moser Engineers: Dan Boyd  Learn more about your ad choices. Visit megaphone.fm/adchoices

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ends of major trends. Motley Fool money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Jason Moser. Jason, thanks for joining me today. Howdy! We've got updates from Target and TJX and a look broadly at retail, but we're going to start out today talking about one of the market's newer entrants, Kava. The fast casual restaurant brand gave its first quarterly update yesterday. Jason, I love the harissa at the restaurant, and I got to say, I like the results from this business so far. This seems like exactly the kind of quarter that you want to see first earnings report from a newly public company.

Yeah, I totally agree. I'm right there with you. I'm a big Cava fan. I think it's delicious. So, I do find myself frequenting there more and more. Several months back, we did a show where we sort of asked right before Cava was going public, is this going to be the next Sweetgreen or is it going to be the next Chipotle? Which one is it going to be? Because Sweetgreen is not working out so well, Chipotle, well, we know how that's worked out. Right now, this sure feels like it has the potential to be more Chipotle-like, maybe at a smaller scale, but still, I mean, the numbers here, this is exactly what they wanted to see, I think, for their first quarter reporting. The company now has 279 restaurants, the results, I mean, 18.2% comp growth. I mean, that is very

Chipotle-like, right? I mean, remember the days where Chipotle was lobbing those numbers up quarter after quarter, they saw 10.3% growth in traffic, digital mix is a good mix of revenue there, 36.1% of the overall business. Having been a consumer of Kava for a while, they did a very good job of getting into that app game quickly. I think they realized the benefits of that, and so they've built out a very good digital presence, which I think is going to continue to pay dividends for many years to come. You look at the restaurant-level profit margin, 26.1%, that was up 400 basis points from a year ago. Just for comparison's sake, you look at Chipotle, they're recording that 27.5% on that restaurant level margin. Again, very similar

in experience and in business performance to Chipotle. I think the one question in digging into this before they went public and understanding the market opportunity there, in understanding they also acquired Zoe's before they ultimately went public. But based on their research and their S-1, they feel like there's potential to have 1,000 or more restaurants here in the U.S. by 2032. And that's, as I said, at the top, there are 279 restaurants now. So, we're looking at a good runway for potential growth there. But to put that in context, you get Chipotle with somewhere in the neighborhood, they're better than 3,200 restaurants now. I don't know that this is a restaurant concept that necessarily can get as big as Chipotle,

but it certainly is one that I think can be successful to a comparable level. I think it can be similar to that story. Being that it's still so early in its growth, there could be of opportunity here for investors. Again, it's first quarter, we'll learn a lot more as they report more and more quarters, and you have to figure they probably will run into a food safety issue at some point or another. That's just sort of part and parcel with the restaurant business. So, understanding how they respond to that, I think will be enlightening. But absolutely, like you said, a great first report. Yeah. Looking at a restaurant business like Cava, I mean, you basically have two main growth levers. You have opening new stores

and you have your existing stores continuing to perform. This is a business, so far, what we're seeing with these results, both of those levers moving in the direction you want them to. And I think what's worth zooming in on, that comps number you threw out there before, Jason, 18%, traffic grew 10%, as you mentioned. Menu prices also grew, but 10% is incredibly strong growth for a restaurant business, just based on the thing that is organic and is going to continue to drive results, bringing people in the door, rather than what's a little bit less sustainable with those menu prices.

Yeah, no question. I mean, traffic is always a good thing to pay attention to, and I think really that's something. I think they'll continue to see a benefit to those traffic numbers, partly because of that digital presence. I think that really reducing that friction and being able to get what you want to get. I mean, you don't have to just go into the store to get it, you don't have to go to the restaurant necessarily, you can order online, you can have it delivered, you can go pick it up. And I mean, you remember the early days of Chipotle, one of the big things we focused on quarter after quarter was throughput, right? I mean, you couldn't go to a Chipotle without knowing that you're probably going to be in a line that went

out the door. And they always did such a tremendous job of really getting people through that line very quickly. But building out that digital presence along with the advent of delivery, that really has helped sort of tackle that issue as well. And I've never run into that experience where I've had to go into Kava and wait too terribly long. I think it's a nice problem to have, but I think it's a little bit of a different landscape today clearly than it was 10 or 15 years ago. And so, certainly, again, they're benefiting from, I think, being able to reach their consumer in that omnichannel sense. And the other thing I will say too, and it's a small part of the business today, but there's at least potential. They do have a CPG business, that consumer package

goods services that they offer in grocery stores. They said in the S-1, their CPG offerings are in 650 grocery stores nationwide. You've got Whole Foods and other concepts carrying kava dips and hummus and whatnot. There is the potential. I don't know that it'll be something that's terribly meaningful. Panera has tried that as well. It's incremental, I think, more than anything else. But it's certainly also a brand builder. It makes you aware of the brand and that could result in either helping sustain those positive traffic trends or even maybe it gives them the potential to open well beyond that 1,000-restaurant target that they called out in the S-1. Switching our gaze over to retail, two very different earnings reports from Target and

TJX this week. Jason, to me, it seems like these two companies are a microcosm for what's going on in retail right now, and the forces affecting businesses in the space. We look at Target first, disappointing second quarter results. Company's revenue of just under $25 billion was below estimates, adjusted to earnings per share ahead of estimates, and the company reduced its full-year outlook. It seems like they're being bitten a little bit by some of that weakness in consumer spending? Yeah, I mean, they definitely are feeling a little bit of a pinch there. Consumers are being a little bit more thoughtful about how they're spending.

And I think that is something we should expect to continue and potentially accelerate here as we see student loan payments start back up here. I mean, that is something, when you just do the math, I mean, that's a lot of money that's going to need to be redirected away from places like Target and back to paying off your student loan debt. But I think Target, unfortunately, it's a bit of a mixed bag, they were able really, I think, to bring it down to the bottom line in a positive way, but the revenue weakness there, revenue down 5% from a year ago, revenue is revenue at the end of the day, if you're not growing your sales, something's wrong.

And so, there's a confluence of factors here, and just going through the call, they noted a few things that really contributed to the weakness here. discretionary spending, as we said, is something that people are pulling back on the discretionary spend. They definitely saw some weakness there in the reaction to the pride assortment. That was something obviously that made headlines here over the last several weeks. And that was something that they felt in traffic as well. And another thing to point out as well, last year, they were really in liquidation mode. I mean, a lot of clearance, a lot of discounting, trying to get their inventory levels back to normal. Consequently, when a store is discounting and promoting

a lot, you see a lot of traffic, which is great. This year, they just didn't see that same traffic. It was a tough comp from last year because of all of that discounting. But the good news is they've got their inventory levels back to where they want them. That inventory at the end of the quarter was 17% lower than a year ago, so that's good. We shouldn't expect a lot of discounting going forward. I understand pulling back on the guidance a little bit based on what we know is coming down the pike here in regard to consumer spending. Yeah, they revised their full-year outlook for earnings, revenue, and same-store sales and brought those down. From the commentary

from management, just piecing together what's going on with this business, less high-ticket items being bought at a lot of these stores, Target and some of their competitors. It seems like also we're seeing more focus on food and essentials. Jason, this is a company where I think about 20% of their revenue comes from the grocery segment, not as high as some of their competitors. Do you look at that as something that's maybe an opportunity for them? Or do you worry a little bit about what that might mean for customer traffic going to the store? It's certainly an opportunity in that we know how powerful grocery can be. I think we'll learn a lot more tomorrow when Walmart reports, because Walmart has done

such a great job of capitalizing on that grocery opportunity. It's just no question. We're seeing retailers across the spectrum here. We're seeing a big pullback on discretionary spending. We saw Home Depot's results, big-ticket items are being put off. Again, we're also seeing this trend where you see this language used a lot in these calls where focus is less on goods and more on services. Consumer spending is going away from goods and more towards services. Clearly, that's something that could pose a problem for Target, at least in the near term. You mentioned before Target's inventory woes. There's one company that I can think of in particular that benefits tremendously from when retailers have some inventory problems,

and that's TJX. We saw results from the parent company of TJ Maxx, Marshalls, and HomeGoods this week as well. Shares of the company of 4% after beats on the top and bottom line. Jason, to me, the headline here is, TJX benefits when other retailers run into problems, and that's exactly what we saw with this quarter. Yeah. I think they benefit, I think, always. It's a tremendous value proposition. It's fascinating to watch. My daughters love going to TGA Max because of all of the discounted stuff they can find from brands that they love. This was a bit of a rosier report as compared to Target. I think that as we see the consumers looking for more value, TJ Maxx, Marshalls, those concepts stand to benefit there. You look at

how this company is benefiting. You've got comp stores at what they call MarMax, which is the TJ Maxx and the Marshalls stores. Comps are up 8%. They said it was driven entirely by customer traffic. This isn't a company where you're going to see a big focus on pricing. They're looking to discount, they're not looking to really raise prices. They create traffic by presenting a a tremendous value proposition. That really is playing out in their results. Yeah. We're seeing that. It's actually similar to what we saw with Kava, in a way. Strong traffic, really helping them move things along. Based on the guidance that we saw from management, they expect that to continue. They raised their full-year outlook for comparable store sales,

pre-tax profit margin, and earnings per share following this strong quarter. Jason, when you look at all of the factors in retail, we see inventory benefiting TJX. We see maybe some opportunistic shopping and some discount shopping benefiting TJX. It's a company that is up on this earnings report. You still feel like there's good opportunity in front of it? I do. I think consumers are always going to love value. I think that while we talk about, for example, the student loan payments restarting, that isn't just one isolated event, that's something that is going to continue. It's not going to be like a one-and-done thing. So, I think that we are going to see going forward, particularly with inflation still where

it is, I think consumers are just being more thoughtful about how they spend. And as we see these retailers talk about spending going away from goods and more towards services, that will come back the other way at some point or another too. But TJX is in a position where they can benefit in good times and in bad. It's like with home improvement. I feel like Home Depot and Lowe's, they're going to benefit whether it's rain or shine, because you're going to need stuff for your house regardless of the weather. I think with TJX, they're going to benefit in good times and in bad. Maybe during more difficult times, their value proposition becomes a little bit more obvious and becomes a little bit more of a tailwind, but it's also worth it. This is a

company that continues to return value to shareholders in the form of buybacks and dividends. You can be patient and it gives you a reason to be patient knowing that you're bringing a little extra cash in there via the dividend. And the share repurchases are working to an extent, right? The share count is down about 4.5% over the last five years. So, yeah, I think consumers are always going to love finding good value, and I don't suspect that will change anytime soon. We'll be looking for more themes in retail in Walmart's results. Jason, I'm curious, I feel like over the last six to nine months, the focus in retail has really been making sure retailers get their inventory right. There's been a little bit more focus on organized

theft and shrinkage. Do you continue to see those as the major things to pay attention to, in addition to the standard stuff of comps and what we're seeing in the top and bottom line? Are there any other stories that you're paying attention to with these retailer earnings? I really think you hit on it there with two very important items there. Inventories, we're seeing those inventory levels come back to normal. Again, it's a difficult comp for a lot of these retailers because of all of the liquidation, all of the value, all of the discounting and promotion that they were doing a year ago, that they're not doing so much now. That's just a difficult comp to get past that, and for the most part, these companies are. But seeing those

inventory levels kind of get back to normal. And yeah, I mean, the organized crime, the organized theft that goes on in this industry, it's really, we're learning more about it, right? We're learning how big of a headwind it can be. It's kind of amazing to think about some of the stuff that's going on here. I would imagine that we will see more of a focus on that going forward, because you just can't have that. You have to fight that every which way you can. And technology, thankfully, is giving these companies better ways to do that. So, yeah, I think those are two very, very important items to keep an eye on going forward. Jason, I know you're paying attention to company earnings. I know you're also kind of in a unique position this back-to-school season,

doing a little bit of different kind of retail attention, doing some shopping and making sure that everyone's good to go for the back-to-school season. Anywhere else you're paying attention to, maybe not even the financials, just stores that you're making visits? Oh, well, Ikea is one that always seems to get a lot of our money. At some point or another, that's going to present a very compelling investment opportunity. But yeah, I think hopefully Target is just getting into this back-to-school season for them. They really call that out as that, along with the seasonal holidays, is really the biggest driver of sales for them year in and year out. It was encouraging to see some positive insight there on the call in

regard to their back-to-school season. They feel like that's off to a good start. It is an important time of year for a lot of these retailers. Target, absolutely. I think we'll learn a little bit more about Walmart's take on the matter tomorrow. Then we jump into the holiday season. I think that'll be the next real litmus test for a lot of these retailers. Because as we know, I mean, holiday spending, even in difficult times, it's still a very, very busy time of year. And I would imagine these concepts are going to be all day. Jason, thanks for your insights and thanks for doing when you can, boost the bottom line over at Target. That's school shopping. Absolutely. Thanks for having me.

As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Dylan Lewis. Thanks for listening! We'll be back tomorrow. Thank you.