Motley Fool Hidden Gems Investing - Walmart Wins Bargain Games

Episode Date: August 15, 2024

The world’s largest retailer is crushing the market. (00:21) Asit Sharma and Ricky Mulvey discuss: - Walmart’s international growth and pricing power. - What broader retail sales data says about the economy. - The economic side effects of weight-loss drugs. Then, (16:39) Motley Fool Analyst Buck Hartzell joins Ricky to discuss Shift4, a payments company putting up impressive growth numbers. Companies discussed: WMT, COST, KR, WMS, LLY Article discussed: https://www.bloomberg.com/news/features/2024-08-07/ozempic-boom-inside-usa-s-weight-loss-drug-capital?ref=biztoc.com Host: Ricky Mulvey Guests: Asit Sharma, Buck Hartzell Engineer: 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. walmart's not seeing a recession and you're listening to motley fool money i'm ricky mulvey joined today by asit sharma asit how we doing we're doing well ricky i couldn't

figure out if I should put the er at the end of that we, or just keep it as we. We doing well, but I think we're doing well. We are doing well. Take the preposition out of it. This is a formal time. While many are softening their spend on things like travel and home improvement, shout out Home Depot, Walmart continues to win the bargain games. And they reported this morning, I'll give you some highlights, and then you can pick from that menu of what interests you. Number one is we got a guidance raise. Wall Street's sure happy about that. to almost 5% for the year previously, it was 4%. That's remarkable for such a large retailer. International sales are up 8%, and that's about double the U.S. comp sales. We've also got general

merchandise, so that's appliances and clothing at Walmart. That grew after almost three years of declines. Anything in the report stand out to you? I think those international sales are pretty interesting because they're differently composed than the U.S. sales. Walmart's been investing around the globe and not just in the same type of formats it has here in the U.S. In the call, CEO Douglas MacMillan called out stuff like India's Flipkart operation, which is more like Amazon.com than it is Walmart. It's a big e-commerce operation over there. And phone pay in India, so P-H-O-N-E-P-E, which means on the phone or using the phone. That's a payments business. Then they talked about trends in China, like Sam's Club in China, which is like the U.S.

format, except for half of those sales, they're being digital because China is such an app-based society. We're starting to see some of these investments around the globe pay off, and they're a little bit higher margin than the traditional Walmart operations. So that stuck out to me. And this may conflict with what I thought previously, but they're also seeing a lot of the wealthier shoppers sort of trade down for Walmart. And maybe, Asit, that is a sign of at least maybe not a recession, but inflation really hurting people. One other note that I thought was interesting in the call is they're seeing pickup growing faster than in-store or club sales. I remember picking up from the grocery store during the

pandemic, Austin, I thought everyone was going back in. I was a little surprised to see that trend continuing now in 2024. How about you? I don't think I'm as surprised. Also, from the call, this is, again, CEO Doug McMillan. Around the world, our customers and members continue to want four things. They want value. They want a broad assortment of items and services. They want a convenient and enjoyable experience buying them. And they want to do business with a company they trust. So, that third point there, Ricky, they want a convenient and enjoyable experience buying the merchandise. That really works well with the trends of delivery and pickup. The way Walmart is structured, as we all know, the floor space is huge. So, getting around

takes a lot of time. If you're able to use the convenience factor of a pickup or delivery, you're going to do that in this day and age. That's a trend, I think, that's just going to keep growing post-pandemic. Fair enough. I keep thinking about the Walmart produce aisles, which there is a high amount of variability in, and I'm surprised to see so many customers continuing to trade off for that. You pay your money, you take your chances. You want convenience. Here's another part of this. Walmart, Costco, big companies, and they have solidly outperformed the S&P 500 over the past 12 months. In that time, the S&P has returned 24%. Walmart is at about 40%. Costco, almost at 60%. I'll throw Kroger

in there as well, as a shareholder. That's at just 11%, underperforming. When you look at this trend, these grocery stores, some of them just really kicking the S&Ps. But what does that say to you? Does it say anything at all? To me, it shows the power of scale. And yeah, I do talk about this a lot, but look at these returns you're pointing out. So, if you took a dollar bill, split it into pennies. You can't physically do that, but let's just start with 100 pennies. I'll put you on the spot, Ricky. Guess how many pennies both Walmart and Costco take home for every 100 pennies that they sell in profit? You're very close, 2.8 something. I didn't look that up, by the way.

Hey, I think you are just on fire today. That's pretty good. Better than I guessed, actually when I looked this up. But here's the difference. If you grow sales at 3% or 4% or 5%, you can work on your operating margin. You can do pretty well with huge numbers if you're selling in the hundreds of billions. Walmart increased its profits by about $500 million this quarter versus last quarter on just a little bit of top-line growth. Investors start to appreciate that. If you've got a huge funnel, what comes out at the bottom can be significant if you are selling more than almost any other company in the planet. And so far Walmart still sells more than any other company on this planet. And that's one reason it has is what you like to call

pricing power, but it's going in the other direction. CEO, Doug McMillan, you called him Douglas earlier. You're very much on your, your formality game today. Well, you told me that we were being formal. You split up my contraction. So I was like, all right, I better, I better be on point here. CEO, Doug McMillan saying quote for the quarter, both Walmart us and Sam's club U.S. were slightly deflationary overall, end quote. You very rarely hear CEOs bragging about how they are lowering prices. But in this case, do you think deflation is a good thing for the pricing leader? Yeah, first of all, for the layperson, that just sounds so flat and sad. They were deflationary. But of course, what he's saying is we were able to lower prices,

as you point out, so exercising pricing power in the other direction, not raising prices, but because of cost efficiencies, being able to lower them a bit to entice customers. I think this is good to a point. Just think of it as a rubber band when you've got a period of extended inflation. That pricing power is going to expand out, but the best retailers are going to let it collapse a little bit back to equilibrium when they feel like they're just at that sweet spot where they've enjoyed a little bit of the pricing power. They don't want to lose their customers. They pull those prices back. I don't see them really decreasing too much beyond this, unless there's a change in commodity prices and they start heading significantly

in the other direction. Let's talk about retail as a whole, because we got some retail sales data today, up 1% month over month. Now, a lot of that has to do with large auto sales gain. A lot of dealerships could not sell cars in June due to the CrowdStrike outage. But we also got data just zooming out on the first seven months of the year. And that's where I want to focus because there's some interesting trends here. One is that restaurant spending is up 5% year over year. Non-store retailers like your electronics stores, that's up almost 9%. But you also have furniture, home furnishing stores, which may be in the same category as Home Depot a little bit, down 6%. So restaurants, electronics

up, furniture down. Are you seeing yourself in any of these spending trends? Or maybe the companies you own if we want to make it investing-y. Yeah. I mean, I can see a little bit of myself in here. That restaurant spend going up 5%. I do think I'm eating out a little bit more every year. I like to eat out and I wonder if they're including the amount that we tip in those totals. It's some places which we weren't tipping before. Maybe those of us who go to a local bakery are just tipping a little bit. I think we've been trained during the pandemic, post-pandemic to remember that that's a local business. We should support it. I don't think twice now. I know it aggravates some people. You hit the button, they put it

right in front of you these days. It only seems like I'm really not here for the service. I'm picking up a good. But if it is a local business, I say support it. Now, off of that tangent, let's just hit one more. Combine those first two things you talked about. Furniture home and furnishings down 6%, but non-store retailers up almost 9%. I do think, again, there's some of that convenience factor going on there. But I will point out, there are certain companies that do a little bit of both of this. Take Williams-Sonoma, for example. That's a company that I own. They are a home furnishings company. They also have a non-store retailer or big online commerce component, they're being able to have a buffer in the fact that we're buying

lists of furnishings just by the fact they run this really great branded operation among multiple brands and they execute very well. That company has done extremely well over the last couple of years. Just to make a larger point here, Ricky, that you can, as a business, go against the grain, go against the trend if you're focused on your business and not always worried about where the customer is, how the customer is going to react. You have to keep that in mind, but you have to put out just a very quality product and make sure from there you're executing on all aspects of the business. Well, and the interesting thing about Williams-Sonoma is that is very much a luxury retailer. So the people who are shopping at Williams-Sonoma may

not be feeling as much of the effects of inflation as those going to maybe, let's say, some lower priced home furnishing stores. I want to move to this excellent long form article in Bloomberg business week it's about ozempic the title is what happens when ozempic takes over your town taking a look at bowling green kentucky which now has it's uh the highest concentration of people on weight loss drugs at four percent of the population if you look at a very coastal city like brooklyn new york we're looking at closer to one percent and i said the reason i'm so interested in this one is because i'm an i'm an eli lilly shareholder but number two is i'm in this place where I really think the effects of these weight loss drugs are going to be

really change society. I think they're going to affect us in ways that we don't fully comprehend, but I also think there's so much investor hype around it that maybe I'm reconsidering that position. So within the article, it talks about some of the side effects for the economy, which is that med spa parking lots are full. This is where people are getting compounded GLP-1 medications. The local gyms are unsure if Ozempic is adding more customers to their business and restaurants are full. When you look at this, this trend, which honestly might be the greatest marketing material that has ever existed for a company, which is someone you haven't seen in six months and you go, wow, you've lost 50 pounds. What happened? I can't think of one better than

that. What economic side effects are you watching after I just delivered that word salad to you? One is, what are the follow-on effects on other businesses? Right now, there seem to be so many washes, so things bounce out against each other. You mentioned the fact that in this article, the businesses around town, especially the restaurants, really haven't dropped off. People are ordering a little less, but they still want the social experience. I'm also just thinking about what it means for consumer goods companies who have to adapt to this. The article mentions grocery stores. I believe Kroger is mentioned in the article as an example of a company that's adapted to potentially lower sales. We talked about Walmart earlier

in the segment. They mentioned GLP-1 drugs a few quarters ago as a potential headwind on their business. They're fighting back now. All these big grocers are mentioning in their calls that, look, we're selling more of these drugs in our pharmacies. Wherever you look in society, except for maybe, I don't know, some smaller gyms, perhaps, it seems like the effects are that you buy the drug, you lose weight, you really don't change your habits. This is quite interesting when you think about the opposition between industries. So, you have one industry, the consumer goods industry, that provides a lot of packaged

snacks and drinks. great line in the articles. Part of the Kroger Pharmacy, which is actually counseling people to take these drugs, is blocked off from view by a Mountain Dew display. This is what the packaged goods industry wants. They want to still be able to sell their stuff, even though people have a decreased appetite. So far, there doesn't seem to be a particularly downdraft effect on that industry. So just how things are being held in opposition is really strange to me. But go ahead. You had a follow-up question on this. Yeah. I want to talk about the hype because there's the weight loss elements and they're

finding more potential uses for this. And I want to be careful how I phrase it. There are some studies that suggest that these GLP-1 drugs may be helpful for things like potentially slowing Alzheimer's disease for some addictive behaviors, such as smoking and maybe drinking where it's maybe not stopping folks who are drinking completely, but maybe they're stopping after one beer. Goldman Sachs estimates GLP-1s to be a $130 billion annual market. So let's set that aside. So we have a $130 billion annual market. Now, the market cap for Eli Lilly has exploded over the past few years from about 250 billion to almost 900 billion. That's a lot. So I think is all of this hype and then some priced in? It's hard to say. And I think as an

investor, the best advice I can give to newer investors who are seeing this type of thing, maybe for the first time, like you have a big trend, a lot of capital flowing into it, results on the ground, which has more money flowing in. And then the hype factor is to just be a little careful. Don't overload in a particular vehicle. So in this case, don't overload in a particular pharmaceutical company. But I do like the idea of maybe spreading your bets around. It's a regulated industry. So we don't know what the long-term effects are going to be on this class of drugs. So far, it looks promising for weight loss. And there's very interesting preliminary indications. As you mentioned, for all types of disease states,

that doesn't mean that a risk out of the blue can surface in a few years. You want to just follow along if you're very interested in this. There are already some thematic ETFs. I would advise they're not very liquid right now, and they tend to concentrate in a couple names like Eli Lilly. But as an investor, you can do your own homework and maybe put together a small basket of companies. So my best answer to you, Ricky, is I really can't tell you how much is hyperpriced in because the R&D is still pouring into this idea and commercialization is going to take a few years. So I hope we can just sort of return to this every few months and exchange ideas on what we're seeing. Yeah, something Tim Byers has said is that for something transformational, we often overestimate

the effects in the short term and underestimate the effects in the long term. I think that's a good place to end it. Asit Sharma, appreciate you being here. Thank you for your time and your insight. Thanks a lot, Ricky. This was fun. All right. Next week, a lot of the Motley Fool money crew is going to be at the podcast movement convention. So if you're attending in Washington, DC, come say, Hey, if you'll be there, we'd love to chat. All right. Up next Motley Fool analyst Buck Hartzell joins me to discuss Shift 4, a payment processor playing in one similar sandbox is Toast with a wild mind leading its way. We've talked about the restaurant payment processor Toast on the show quite a bit. It's capturing a lot of investor attention, but we

haven't talked about one of its primary competitors as much. It's called Shift4, which plays in a similar vertical, but also some others. Buck, let's differentiate these companies a little bit. Who are the customers that Shift4 is going after with their payment processing solutions? Yeah. There is some overlap between them and Toast, as you say. I'd say that's mostly in the restaurant vertical, Ricky, when you look at it. I'd say, if you look at Shift4, though, they're a diversified business. So, I'd say about a third of their business is coming from restaurants. And when I say restaurants, that's a big kind of term. It's mostly table service places. It's not quick service or fast food restaurants or the coffee shops or

bakeries. Those are kind of different people play there. But they're in the table service restaurant. It's about a third. Then you have hotels, which was their second place that they moved into. And then the third vertical, which is really just evolving right in front of our eyes here, is in stadiums. So you see stadiums and events. And I would also throw in their specialty retail stuff as well. So about a third, third, third. One of the most difficult things, I think, as a retail investor judging any of these payment processing companies is figuring out how they're different from other ones. So if I'm a restaurant or a hotel, why would I go with a shift four versus, I mean, not just Toast, but Block, Adyen, any of these other payment processing companies?

Yeah. You mentioned there's some big ones. And I'd say, particularly in the restaurant space, that is super competitive and super cutthroat. And that's originally where these guys, Shift4, cut their teeth. And their area of that, like I said, table serves, they've done really well. But what you look at as somebody who buys it is something, well, you want total delivered cost. So you want a low cost product that allows mobile ordering and all the different stuff that you see now at restaurants where you used to be able to like, you have to give your credit card to somebody. You hope they don't copy down the number when they take it in the back and some magic happens, they charge it. Now you can do it right at the table. And for some of these stadiums,

they obviously are doing ticketing. That's a huge deal for shift four, but also mobile ordering and all that stuff where you can just kind of order right from your seat and do all that stuff. So So they have SkyTab is what their point of sale solution is called. It's a cloud-based system that also you have a little tablet or whatever else. You can also do mobile ordering from there. That's their solution. So it's a technology solution. It's a low-cost product that basically, I'll put it in Tim Beyer's way, it solves a lot

of problems for people who run restaurants and venues. Something that investors have sort of dinged Shift4 for, and I don't know if it's fairly or unfairly is, uh, is the company's acquisitiveness. Yeah. I don't have an opinion on it. So just to set the table, how does this company use acquisitions? Yeah. So I'm going to change. I'm going to reframe that a little bit. And I'd say, first of all, at the Motley Fool, and I'd say myself in general, I can't speak for everybody, but I think generally the research has shown that acquisitive companies can, it's difficult. It's difficult to make acquisitions well. We're skeptical, I think, at the outset. But what we see here with Schifor is a company

that was founded by Jarek Isaacman, literally in his parents' basement when he was 16 or so years old. He's been running this for a few decades now and growing the business. What they've seen is that you can hire a whole bunch of salespeople, load them up with stock comp and incentives and different things, then go in and be competitive and try and win over restaurants and venues. Or you can go out and buy competitors, and by definition, you get their customers. And they've done the latter. So they've done acquisitions. They've done them very well. And what I've seen is people that do acquisitions well, they're rare. But the ones that are good at it can create a ton of value. And one of the things that I think,

well, there's a few things that they do differently than the typical acquisitive company. But one of them is they don't do auctions, so they're not doing bidding wars against banks. They proprietarily source their acquisitions. And what they do is they come in and they buy them, and then they basically blow up the business model. So the companies that they acquire may have a lot of one-off revenues, selling hardware or selling software once or doing whatever else.

They come in and they basically remake their business model. They introduce them to SkyTab. They get those customers over there. They cross-sell them other products. And then what you see is over time, there's a high proportion of recurring revenue. So it's a much higher quality base. At the beginning, it'll go down their revenues and then they come up. And in the recent conference call, they gave two examples of those where, you know, one, they raised the revenue from that company sevenfold after they acquired it. But of course, it had to go through this down period and convert their customers over.

So they're one that is a serial acquirer. And I don't think that's a bad thing. And we noticed when you look at the financials of this business, they haven't diluted shareholders very much on average, about 2% a year. And that's, that's really good. So all the benefits of those acquisitions, first of all, they've proven they can do them at good prices. They've proven they can run them better. And then most of the value has accrued to shareholders because they haven't just paid any price and going out there and auctions and given lots of stock away in order to do that. But payments is a scale business. So you can organically go out and win people and win them over, or you can acquire them. They've done more of the acquiring side and it's worked

out wonderfully well. So I don't make a distinction. Yeah. It looks a lot like a customer acquisition strategy than, than sort of bolt on acquisitions. Exactly. Yeah. You mentioned the verticals. Is there one, you know, stadiums, hotels, now they're in a gaming casinos, sports betting, that kind of thing. I think the CEO, Jared Isaacman was the first person to make a sports bet from space when he was flying over Las Vegas restaurants, which is kind of what they started with. Is there any of these that are particularly interesting to you as an investor following this company? Well, they're all interesting, but I think the one that's given investors a nice opportunity to get shares at an attractive price has really been the larger

clients around stadiums and those types of venues. Because what you see, even when you announce a deal with them, the load times are much longer. So let's say you get a stadium, a big European soccer stadium. Well, it's the end of the season. So you have to wait till next year to onboard those till you see any benefits from the acquisition. And not acquisition, but the new customer. And then the other thing you see with these large kind of venue stadium deals is the margins are much thinner than what you'd have if you sold a mom and pop restaurant down the street, right? So these are big deals with a lot of volume. And so margins get hit a little bit and that's fine. They're still going to make plenty of money on these. And obviously

the first move into those stadiums is doing concessions and that kind of stuff. But then they've had a lot of success winning over ticketing, which is a much larger number and selling all the season ticket holders and all that kind of stuff. So, um, anyhow, Now, I'd say stadiums for me is really impressive, and the amount of new folks that they have coming over from there is pretty immense. There's been a couple of signals from the company over the past couple of years that have been interesting. Last year, the CEO, Jared Isaacman, told investors that the company was undergoing a strategic

review. This usually means that the company wants to go private. He mentioned being public is a bit of a distraction. Earlier this year, Bloomberg reported that Isaacman said the buyout offers just didn't adequately value the business, not that it's no longer for sale. Now you're also seeing Isaacman buying up stock on the open market. What do you see these signals meaning for Shift4's retail investors? Originally, when I heard the term Strategic Review. It scared me, to be honest with you. Nuve is a company in this same space that's had some similar things go on, and they elected to go private. And unfortunately,

what that meant for passive shareholders like myself was we had to sell out a kind of a bargain while the insiders kept their shares, right? And so that's like the worst of all outcomes. like the stock has some volatility on the downside, and then they go private, and then you have to sell out, and maybe they come back to the public markets later at a higher price. But refreshingly, what Isaacman said to Schifor was, he's not going to do that. He's perfectly aligned with other shareholders. And he basically said, we're a nuisance in the industry. And you know what? You can buy us out, but you're going to have to pay up for it. And I'm fine with that. I'm fine with that as a shareholder. So, I think the good news on that strategic review front is,

they're not selling the company out from us or forcing us to sell it at a bargain price while insiders keep shares. And they also said that, hey, at the right price, they're growing at a huge rate, that if they get a price that's reflected, they'll go away. And so, I'm okay with that. Isakman doesn't think the open market's giving his stock a proper price, considering he is buying up shares. Yeah. Well, and I would say he's done in the past several forward contracts where he's basically taken some cash up front, but kept his voting right in those shares. And he's gifted, um, gifted some of that to charitable organizations, but he keeps his voting rights. So I think, and there's kind of caps on that, but so he kind of

keeps the upside when he gets cash out, but he still gets his voting rights. And so he's done some things where it shows that he believes there's upside in the stock, right? And certainly buying stock on the open market, which I think he did recently at around $67 a share, and it's at $75 today. The other thing I'd say is they buy back stock, too. So they bought back some in the quarter. They bought back some since they've been public. And they've done it at attractive rates. CEO Jared Isaacman definitely sort of has beef with the valuation, saying on the latest earnings call, quote, if we were simply known as the toast of hotels and stadiums, we'd probably be more appropriately valued, end quote. This is a company, while it's been around for decades,

it still has impressive revenue earnings, free cash flow growth. It's raised guidance. But if you look at the earnings price tag, it doesn't look like a growth stock. So what isn't the market buying about ShiftForce growth story? I think Isaacman's part of that, to be honest with you. We haven't really talked about him, but he's a colorful character. flies around in airplanes, but not just airplanes, jets. He's been to space, right? And to credit to them, I think since they've gone public, and they've been public for 17 quarters now, they've bought back 6.5 million shares at an average price of $54. It's a $75 stock right now. So it's not just Isaacman buying on the open market, but the company has bought back shares,

and they can do that because they have a history of positive free cash flow and generating profits, which I think a lot of the technology startups have not prioritized cashflow in the way that shift four has. So I'd say what I've learned over many years of kind of investing, if you look at people that are founders, that are visionary folks, they're not cut from the normal cloth and Isaac Smith's not either. And so I think he's a little bit of a lightning rod for some folks. Um, but I'd say I've learned, like, you don't found a company at 16 in your parents' basements. None of us have done that. You don't build it over decades to be a multi-billion dollar company with plenty of critics along the way and question marks. It is hard to do. Like you need to be a

special person. And those people are usually, usually optimists. So I think when they look at their business and they know it, they've run it for a long time. They usually can recognize when the market is saying, hey, we don't think you can go this way. And just because you go through acquisition, that's not going to work. And I would say, arguably, we're coming into a time where it's a much better time to be an acquisitive company. We went through the time with 0% interest rates, where valuations and multiples were sky high. And Shift4 did fine, by the way. But guess what? Now we're in a part where interest rates are much higher, and some of those firms didn't operate nearly as profitably and their access to capital is not that

great. So it's a wonderful time for, for shift four to be coming in and buying some of these companies. Morgan Housel would call, would call him a wild mind. And often you get, you get both sides of a coin and you don't get one without the other. Yeah. I think that's a good place to end it. Buck Hartzell, appreciate your time and your insight on this. You're welcome. Thank you very much. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.