Motley Fool Hidden Gems Investing - Wal Mart Shows Other Retailers How It’s Done

Starting point is 00:00:00 Tyler Crowe. Walmart does something few retailers have done this quarter, and Meta changes its AI plan. This is Motley Fool Money. Welcome to Motley Fool Money. My name is Tyler Crowe. I'm joined by longtime fools, Matt Frankel and John Quast. We have a really interesting show today. We're going to talk about Meta's kind of changing AI strategy, AI plan, and how they plan to spend and tackle that, as well as look at a lightning round, we'll call it a smattering of questions related to some interesting news stories around the world of investing that we found today. But we want to start off with our first segment, which is talking about Walmart's earnings. Now, Walmart reported

Starting point is 00:00:50 second quarter earnings before the bell this morning, and the company's earnings were slightly lower than analyst expectations. But not from the places we would normally assume when we talk about retailers. Management noted things like insurance claim costs and legal costs were the reason for lower earnings, rather than, I don't know, the thing that was on everyone else's mind, tariffs and the sentiment of the consumer. But I think there was actually a bigger theme that we want to hit on here today. And yesterday's show, we talked about Target's kind of blah earnings. And their sales guidance, along with other retailers, not really looking great for the rest of 2025 as they digest tariffs and the customer sentiment. But then Walmart came over

Starting point is 00:01:35 off the top rope today and basically increased their sales guidance for the rest of the year. So here's my question to both of you. What is your opinion on why Walmart continues to thrive while so many other, we'll call them historically successful and good retailers, Target, for example, seem to be struggling in this current sales environment, even after a couple years of trying to figure things out post-COVID and all of the challenges that has created. Well, Tyler, I think we have a couple of things going on here. First and foremost is that Walmart is cheaper than Target, generally speaking. Now, to be fair, the prices are comparable, but various third-party reports show that Walmart is

Starting point is 00:02:17 generally cheaper. And that's kind of a big thing right now in the economy in 2025 with consumers. They're pulling back on spending when possible. Now, so perhaps you like Target's aesthetic better, but in a pinch, you're going to go to Walmart to save a little bit of money. Now, I think it's important to ask, why is Walmart cheaper, even just marginally so? And I think one reason, and it's pretty big, is that Walmart only sources about a third of its products internationally, whereas Target is believed to source more than half of its inventory from overseas. And specifically from China, that's a pretty big market for Target. And so when we're talking about tariff pressure, Target's going to feel it a little bit more, is therefore a little

Starting point is 00:03:00 bit less flexible on its pricing. Walmart has more flexibility and can lower prices and take market share. And I think that's what we're seeing happen to a certain degree. Yeah, I agree with John on everything he just said. I would add that consumers have been cutting back on spending, especially on discretionary items. And that was especially true in the second quarter. Remember, this was the Liberation Day quarter when we were kind of at peak economic uncertainty for a while. And Walmart has a long history of doing better when consumers become a little more cost-conscious. For example, a lot of people don't realize, if you haven't been investing that long. Walmart was the best-performing S&P 500 stock during 2008 when the financial crisis

Starting point is 00:03:42 was going on. For good reason, its sales increased. Their management's reporting no noticeable change in consumer spending. I don't know if that's true across the economy, but it's at least true at Walmart. 4.6% comparable. Same-store sales growth is impressive, especially considering Target's decline. Impressive quarter. I want to get into that, too, because it's not just comp sales from its existing stores. Obviously, Walmart is starting to branch out into some other places that most of us probably don't expect as much to be, I would say, tangible drivers of the bottom line. But they're becoming big enough now that they're worth thinking about in terms of investment pieces of Walmart. Matt, I want to start with you with

Starting point is 00:04:24 Omnichannel, which is the fancy word that management likes to use for e-commerce and things like that. Do you see this as a key differentiator, specifically with this omni-channel grocery delivery, all that stuff? Or is it just a nice-to-have for Walmart right now? It's really started to make a significant difference in their sales, as you just said. It's really funny how different retailers have been winning the omni-channel race at different times. If you had asked me five years ago when the pandemic first started, I would have said Target was the winner. They were the ones who first made the drive-up parking spaces you could stop and get your stuff at. They were doing a great job of pivoting to omnichannel retail.

Starting point is 00:05:08 But Walmart has just done a fantastic job of building out their omnichannel, especially when it comes to groceries. My wife and I prefer to go to Publix, but we get groceries delivered from Walmart because it's easier and cheaper. They've done a great job of that, and it's really resonating with consumers. I think that the delivery aspect of it is just going to get bigger. Matt, I want to jump in here as well, talking about Walmart and what it's done with some of these other digital businesses. When you look at advertising, for example, this is an over $4 billion business for Walmart. This is huge. It's high margin. There's another driver, once

Starting point is 00:05:45 again. Maybe overall, Walmart's such a huge business, it doesn't seem like much, but it does provide that little incremental boost to the profits. That does give it even more flexibility there again, yet on its pricing. And I think if you look at Target, this is an opportunity. Definitely, it's something that the company is focused on. And look, if you're an advertiser, you want to get in front of big audiences. And Target is still a $100 billion business. So, it's still a big business. Advertisers, I think, would like to get in front of that. Target is looking at building out its third-party marketplace, selling ad slots on its website. So, there is an opportunity here for sure, but I think Walmart is farther ahead in its strategy

Starting point is 00:06:26 than Target. That does give it a little bit more of an advantage. Yeah. The one caveat I'm going to leave with all of the discussion with retailers today was that this was the quarter that basically ended June 30th. There has been a lot of changes in terms of the tariff regime, whether it be China, whether it be individual products and things like that. There's still a lot of uncertainty as to how those are going to trickle down into consumers, whether companies like Walmart or Target are going to have to eat those as they start to actually impact prices downstream. And so, while this was an interesting quarter from the consumer perspective, I'm really, really interested to see what comes in this third quarter as we start to see some of the

Starting point is 00:07:12 impacts of tariff be a little bit more tangible than what they've been. And now coming up, we're going to talk about Meta's AI hiring freeze and what that could mean for AI investors. Today's theme is a little bit about follow-up questions from some discussions that I had yesterday on the show. We talked yesterday about Sam Altman's quotes to media about AI being in a bubble and some high-flying AI stocks that have been tumbling as of late, and more and more market chatter about, hey, are we in a bubble or something like that? But, you know, had I known that this story from the Wall Street Journal that Meta was freezing its hiring at its AI division, I think we would have certainly talked about it a lot more. But that's what we're here today to do is kind of dive into this a little bit more.

Starting point is 00:08:01 So according to the Wall Street Journal, Meta has frozen hiring at its AI divisions and is going through what they'll call a corporate overhaul, a little bit of a restructuring. Now, I find this news rather striking, at least on the surface, because it seemed like just a few weeks ago, Meta was trying to sign other people, leaders in the AI space, away from competitors with bonuses in the nine figures. We're talking about large contracts for some of the biggest sports players out there. It's hard to fathom, for me at least, to see some of those numbers being tossed out. So, instead of trying to gaze into the AI crystal ball again, like we did yesterday, I want to get to both of your thoughts, more specifically on meta in the AI race. You know, around what could be, well, I would like to categorize a little bit as, we could call it erratic spending for meta over the past couple of years. And I don't just mean about AI. It spent a considerable amount of money on its virtual reality venture.

Starting point is 00:09:05 And I think so far, I don't know who would be calling that a resounding success. It seems to be a little bit of a struggle. And this AI spending trajectory, it feels like a little bit of a spend, spend, stop. Again, feels a little erratic on the business planning space. Does this news about meta spending, hiring freeze, change how you view meta as an investment or how it plans to attack the AI space? For one thing, Facebook is such a successful platform and so profitable that the amounts of money you're talking about are relatively small for the company. On one hand, Meta can

Starting point is 00:09:43 burn through billions of dollars on AI spending, and Facebook is still going to keep the company really profitable. But on the other hand, the strategy does seem to be, hire as fast as you can, don't worry about the money, and then we'll figure it out. From reading the article on this, one of the most striking things to me is Meta's dividing its AI personnel into four teams. And one of them is internally referred to as the TBD team, meaning to be determined, meaning they don't really have a clear role yet. So I do think the pause is a healthy move. I know I'm the optimist of the three of us here when it comes to things like this, but it seems like it's a, I applaud the move if it results in more organization

Starting point is 00:10:22 and a clearer direction, but it is kind of erratic. You're right. Yeah. I mean, the way that this is getting spun by many outlets is that maybe Meta has some sort of a problem. And so they're hitting pause and they're maybe not spending anymore when it comes to AI. And that's simply not what's going on. Meta PR is out there today clarifying what's going on. Yeah, they're hitting pause just to get organized, as Matt said. And Tyler, as you alluded, they're, they're saying that maybe in some cases they hired people with a $100 million signing bonus. I mean, Starbucks CEO, Brian Nichols has one of the largest pay packages I've seen in the restaurant space. And it's not even that it's like 96 million somewhere in there. So, I mean,

Starting point is 00:11:07 meta just to get these people is spending an incredible amount of money. It's, it's got the team, but it needs to get organized now and develop its plan. So that's what the pause is all about. I say, I agree with Matt that that's a great idea. Let's get organized and let's collect our strategy here. I agree with Matt as well. Meta has earned the right to throw gobs of money at what it wants. It's not like it's not rewarding shareholders. It's repurchasing shares. It's paying a dividend. Net income is at an all-time high. It is giving back. It's not being stingy. At the same time, if you're an investor, you do want it to not hoard its cash. You want it to come up with a big idea that's going to move the needle for the business.

Starting point is 00:11:48 Now, obviously, you want to see a return on that investment at some point. And to your point, I don't think we've seen that with the metaverse. I don't know if we will see that with the metaverse. So, you definitely want to see that with AI. But I'm not opposed to the company spending generously to build a big strategy. Yeah, very successful businesses do, to a certain degree, have a little bit more leeway when it comes to making big bets and spending a lot of money, because heck, if you make a lot of money, you've got to do something with it. But I think between this story and yesterday's discussion that we had about AI bubbles, there's a common thread I think investors should remember as we start to contextualize

Starting point is 00:12:28 the AI world and investing in AI, is that progress in this industry and like so many other industries isn't going to be only exponential or go parabolic in the next couple of years. There will be stumbles along the way. The challenges with some of the recent iterations of chat TPT and Lama is that progress will likely come in stepwise functions where we'll see these breakthroughs and then probably long periods of flat or frustration because the progress seems to get muted for a while. I think this is going to be par for the course for this industry for a while. But thinking about it from an investor's standpoint and the tenets that Motley Fool, Hidden Gem investing has been for so long, it's not just about

Starting point is 00:13:16 acumen of identifying good ideas. It's also the temperament to hang on to them through the ups and downs. This means both being willing to hold on to businesses you believe in through rough patches and also setting goals and expectations of stocks in which we invest are reasonable. I think trying to bet that this is going to 100x the stock in a couple of years is going to be unreasonable. So, I promise everyone out there, this is not going to be the last time that we talk about the trials and tribulations of AI, because it's a great story, it's fun to follow, and a lot of people are going to care about it. But it's not going to be linear. Sometimes it's going to look awesome, sometimes it's going to look tough. And being able to see

Starting point is 00:13:54 through the short-term challenges and holding great businesses over the long term is one of the advantages that we individual investors have over the institutional world. And we need to use that advantage wisely. And with that, we're going to go on to a quick lightning round after the break. We are going to get into a little bit of a lightning round, short stories, some interesting little nuggets that we saw in the news recently that relate to a lot of companies we love to talk about. And more than anything, they're kind of fun. So we want to hit a whole bunch of different topics and get some quick reactions to it. The first one was, Chipotle is actually looking to get into drone delivery. Matt, you brought this to the table. It was basically the idea that

Starting point is 00:14:36 they're going to be testing drone delivery of Chipotle in the Dallas metro area, the thesis being, hey, if we can do drone delivery, we can probably actually facilitate better delivery from fewer kitchens, which would obviously help with efficiency. So, I'm going to ask you both really quick questions here. Chipotle drone delivery, is this going to make you more likely to order in your area? Look, Tyler, I come from a farming slash blue-collar family in Buffalo, New York. We value hard work. This just feels really lazy to get a burrito delivered to me by drone. So, no, I will not be ordering. I'm not more likely to order because of this. It depends. For me, it's not about being

Starting point is 00:15:22 lazy or not, it's about efficiency, especially if they could figure out how to get the drone through my third floor window here, so I don't even have to go downstairs. It could just bring me lunch. But this does feel like an interesting move in the post-Brian Nickell era. ZipLine is the company that they're partnering with. And if you haven't checked out ZipLine, this is one of the cooler private companies out there doing some really great work in Rwanda with some blood delivered to some remote outposts. So definitely check them out and learn more about it. Always good stories out of sometimes not the most serious stories. On market reactions, I think we all remember the SPAC boom of 2021. Well, I think we're trying to get another version

Starting point is 00:16:00 of that. What do we call that? A SPAC aftershock after the first earthquake. So, Chamath Palihapitiya is looking to start up the SPAC game again with a recent blank check company with the idea of investing in American exceptionalism. Never blame the guy for marketing, because that seems to be one thing he does extremely well. The quick question for both of you, what is one lesson you learned from the 2021 SPAC boom-bust period that we had that you want to carry into perhaps the next version of a SPAC boom? Yeah, I'd say for me, the big lesson is don't believe any projections you read. Unlike traditional IPOs, when SPACs file with the SEC, they are allowed to make projections,

Starting point is 00:16:47 even completely outlandish ones, to investors. Don't be caught up in that. Evaluate the business on its own merits. For me, I would encourage investors to definitely check out how many shares are being sold to retail investors and how many shares are being held back for insiders and for pipe investors. A lot of times in the past, it was very few shares going out to the retail investors, this created all sorts of supply and demand issues, and then insiders and the pipe investors dumped when the share price spiked. And so, you definitely need to understand the incentives behind the SPAC that you're investing in, because a lot of times those incentives aren't aligned with retail investors. All right. And then last one,

Starting point is 00:17:29 John, this is for you, because I believe you have a little bit more of a personal connection with Cracker Barrel. But there has been quite a bit of less than hospitable response to Cracker Barrel's, we'll call it, redesign or marketing push. So, look, I've never been to a Cracker Barrel. There weren't exactly many where I grew up. So, somebody who worked there, I do have to ask, what do I need to get the first time I go to a Cracker Barrel? Yeah, I worked there right out of high school, what I usually got was the biscuits and gravy because it was cheap on the menu and I really do like biscuits and gravy. I like the chicken fried steak when I'm there. That's always a winner for me. As far as the rebrand goes, I think that Cracker Barrel might be barking up the

Starting point is 00:18:15 wrong tree. I don't see their biggest problem as being a customer loyalty problem, a restaurant traffic problem. I mean, there is a little bit of an issue there, but I don't think that's its biggest problem. I think its biggest problem is in-store operations and those profits that go along with that. So right now, it's completely redesigning its stores, completely redesigning its aesthetic. I get it. The whole country kitchen idea, it's chic. It could work well. But I think that what Cracker Barrel is doing is risking alienating its loyal customer base. And that is one thing it can't afford to lose. And so I would have liked them to focus more on the menu, in the kitchen, and how to drive more profits out of their store before they looked at

Starting point is 00:19:00 really a major, major overhaul in the branding. All right, we're going to get out of here. But before we go, a nice way to wrap up the week, let's do three stocks on our radar. Matt, you go first. Yeah, I'm looking at Trex, T-R-E-X. It's down pretty big after earnings, but its interest rates hopefully fall over the next two to three years, and people are more comfortable with using their home equity to tap it to fund big projects. It could get a major growth tailwinds. That's what I'm looking at this week. I'm going to cheat a little bit because I'm taking the host chair and I'm going to invoke host privileges in doing that. Instead of a single stock, I'm going to say I'm looking

Starting point is 00:19:35 at small regional banks. There's this handful of banks in the less than $1 billion market cap range that are all trading well below their tangible book value, when national and super regional banks like the Drapey Morgans of the world are trading at pretty sizable premiums. Now, most of them don't have the additional functions like wealth management, like those big ones do. And loan books are more related to the communities they serve. But I think credit quality has been very good nationally so far and relatively solid. So it's not as though we're talking about compromised loan books here. So I think there's a compelling pocket of value in these very small, underserved, undercovered area of the banking industry.

Starting point is 00:20:15 John, what's on your radar? Yeah, I'm looking at TripAdvisor, ticker symbol T-R-I-P. And to be honest, I don't really care about the TripAdvisor brand. The company actually owns several brands, including a brand called Viator. Viator is a bookings and experience platform, and it is actually doing really well. And a lot of people don't realize it's there, just kind of buried in the company. It's generated about $900 million in trailing 12-month revenue at a 90% gross margin. It's growing at a double digit rate. I think if it was a standalone company, it would honestly be worth somewhere around five times sales at least. You're looking at a $4.5 billion market cap. For perspective,

Starting point is 00:20:56 TripAdvisor is worth less than $2 billion. I'd say that this company is significantly undervalued. I would think at some point, TripAdvisor is going to spin out by a tour and create shareholder value that way. I'm pretty interested in this company. A couple of fun ideas while everyone's thinking about stocks going into the weekend, and certainly away from the big themes of AI and everything else we talked about. So I want to thank Matt, John, thanks for joining me today and sharing our thoughts on all this stuff. I'm going to hit the disclosure and we can get out of here. So as always, people on the program may have interest in the stocks we talk about, and The Motley Fool may have formal

Starting point is 00:21:31 recommendations for or against, so don't buy stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out the show notes. For producer Dan Boyd and the rest of the team at Motley Fool Money, I'm Tyler Crowe. Thanks for listening and we'll chat again soon.

Motley Fool Hidden Gems Investing - Wal Mart Shows Other Retailers How It’s Done

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