Motley Fool Hidden Gems Investing - Walmart's Tech, One Activist's Fight

Episode Date: January 12, 2023

Walmart isn't the first company that comes to mind when thinking about technology platforms, but that's not stopping the retailer from expanding. (0:21) Emily Flippen discusses: - Nelson Peltz and Trian Fund Management pushing for a seat on Disney's board - Why Peltz is "a day late and a dollar short" - Salesforce partnering up with Walmart   (11:30) Ricky Mulvey talks with Jamie Harris, CFO of freight booking company RXO, about what his business saw during the holidays and how RXO is disrupting a surprising industry.   Our new report, "5 Pullback Stocks" is available for free to Stock Advisor members. To access the report just go to www.fool.com/Pullback.   Stocks discussed: DIS, NKE, WMT, CRM, RXO   Host: Chris Hill Guest: Emily Flippen, Jamie Harris Producer: Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Don't you wish you could just hit skip on the worst parts of your life? You know, the same way you can skip an ad? I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently, that's how I roll.

So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. We've got an activist fight brewing in the entertainment industry. Get the popcorn. Motley Fool Money starts now. I'm Chris Hill. Joining me is Motley Fool Senior Analyst, Emily Flippen. Good to see you. Hey, good to be here, Chris. It's been a while. It has been a while. Let's start with a good old-fashioned fight, shall we? I'm referring to the fight brewing between Disney and Tryan Fund Management, which is the activist firm run by Nelson Peltz. In short, Nelson Peltz wants a seat on the Disney board.

Tryan has a small stake in Disney stock. Disney is not interested in Nelson Peltz joining the board. They are, however, or I should say they were, however, happy on Wednesday night to announce that Nike chairman Mark Parker is going to become the new chairman of Disney's board. Where do you want to start with this? Well, let's start with Pelts, because Pelts here is a day late and a dollar short to this conversation. Disney has been struggling for a number of years since their former CEO, now reemerged CEO, I should say, Iger, has returned to the company. This was Disney recognizing that when they brought in Bob Chapek, that the strategy the business had taken had not yet been showing off. In fact, if you compare

their operating income from 2019 to where it is today, it's cut nearly in half. You can understand why this is a conversation that investors are very interested in, why there's activism interest in Disney, because the financial picture for the company has taken a turn, so has the stock price itself. But it seems like the company is attempting to rectify some of the errors that they have made over the past couple of years by changing out their CEO, bringing in Mark Parker, which as you mentioned, he's a Nike executive, but he has experience helping Nike with their own CEO transition. This is Disney bringing in somebody to the board who they think is going to help with their own transition after

Iger's two-year turn comes to an end. But then we have Pelts coming into the show. Now, To be clear, this activist in particular has been having conversations with Disney for an extended period of time, so this isn't entirely new. But they're looking to, quote, turn around the business by getting information about essentially where the money has been going, executive compensation being a big conversation, but also just efficiencies. Why have they lost so much money pursuing stuff like Disney+, their streaming services, whereas other companies, I mean, Netflix has shown a certain level of scale in this industry

Disney has yet to achieve. Lots of question marks happening right now, but ultimately, I think Pelts is fighting an uphill battle with this desire to get some type of transparency and representation on the board. Let me take one tiny part of this piece and just put it aside for the second, and that is Nike. I'll just say as a Nike shareholder, I'm not exactly thrilled about the fact that the chairman of the board of Nike now has an additional job. That being said, I totally get why Disney would make this move. As you said, Parker has that experience. Let's face it, for all of the wins in Bob Iger's CV, CEO Succession is not on the list. If he doesn't get a failing grade in CEO Succession, he

he maybe gets a D. I'm torn on this because, other than my Nike steak, I don't really have a stake in this fight. I can see both sides of this. On the one hand, Peltz doesn't appear to be agitating for anything revolutionary. As you said, there are legitimate questions to be asked about executive compensation there. On the other hand, Tryon has 0.5 percent of Disney stock. I totally understand anyone on Disney's board, including and especially Bob Iger, who says, I'm sorry, this is small potatoes. If this was a fund that had a 5 percent stake or higher, I could see more of a battle here. And I will say, you know, it's obvious to me that when you look at Nelson Peltz and the push

to have some type of representation on the board, that if the situation had been different in the sense that Disney was ignoring the problems that existed, saying we don't have an issue, maybe there'd be some steam to be brought up there, right? Frustration from other investors who would support a prominent activist to be brought onto the board, even given their relatively low stake in the company overall. But I think the moves that they've been making, again, bringing Mark Parker onto the board alongside the changes in the CEO structure, all of these things are Disney acknowledging, hey, we know we have issues, we're going to work on fixing them. In fact, Peltz has even said that his firm really wants access to internal docs to

see if there's room for improvement, so they're open to being a board observer as opposed to actually sitting on the board, that may be the solution here. But it is interesting to see, I will say to give Chapek some credit here, Bob Iger was really the person who pushed forward two pivotal moments for Disney. One is their acquisition of Fox and the other one is their move into Disney Plus and streaming. He was all in on both of those initiatives and then handed over the reins to Chapek shortly after making those decisions. Chapek was dealing with a stacked deck in the sense that he had to implement a strategy that was taken from his predecessor. So for Iger to come in and then say, well, obviously we didn't handle a CEO transition

well, Chapek didn't succeed. It's kind of like, yeah, well, if he didn't succeed, it has less to do with his inabilities and more to do with how you set him up in terms of strategy. I think what I'd want to see from Disney as a shareholder would be to ask the business, okay, let's acknowledge the mistakes that we've made in the past and let's push forward how we're going to change them. I want to see how they're going to make Disney Plus more profitable. That's a big question mark for investors. I like the changes they're bringing to theme parks and I want them to be more open, honest, and transparent with their strategies for monetization moving towards in the future. If that's achieved through an activist, great. I don't expect it will

be. I see Disney leadership that is recognizing the wrongs that they made and pushing for change in the future. I'm not overly concerned with the business or its stock. We'll definitely keep watching because this fight is absolutely going a few more rounds. This morning, Walmart announced a technology deal with Salesforce. The twist is that Walmart is the one selling the tech. Walmart has two services that will now be offered through Salesforce and listed in its app store for businesses. One is called Go Local, a delivery service that drops off purchases at the customer's door. The other is called Store Assist, which helps employees get orders ready for curbside pickup and delivery more quickly. You and I were chatting about this before we

started recording, I was surprised by this. Simply because, and I don't think I'm alone in this regard, even though Walmart is a massive company with lots of technology within the business, I don't think of it as a business that is looking to essentially sell their tech elsewhere. That was the surprising part to me. Although on a day when the market is up slightly. This is not doing anything for Walmart stock. I'm surprised, I'm not necessarily excited and Wall Street and all investors everywhere share in that lack of excitement. It's funny, I read this story and I thought to myself, this is a nothing burger for Walmart. Not because it's not exciting or new or innovative, but rather because this is

a continuation of the strategy that Walmart has already expressed was their intention for a number of years. I think they first got interested in offering businesses services when they had success with their e-commerce offerings, realizing that when people go to Walmart.com, they don't have to just see stuff that they can buy from Walmart, but they can actually partner with other third-party retailers becoming more Amazon-esque. It was never a big part of their strategy, but it was like, hey, we already invested this technology infrastructure to create this site, why not get all the value out of it as possible? The same thing happened in August of 2021, so a number of years ago, when they launched

GoLocal, which as you mentioned, is their delivery as a service business. This has already been available for third parties to essentially use the fulfillment structure that Walmart has set up to reach especially suburban and rural areas where they may not be able to use existing networks to reach those customers. It's a small part of their business. Again, I don't think they're so aggressively going after this market that it's fair to compare them to the Amazons and the Shopify's of the world, but they are certainly getting more interested and involved in leveraging their fulfillment network to the full extent possible. The announcement we have today is just saying, hey, these things that have already been offered by Walmart for the past year or so

are now going to be more easily accessible to all the Salesforce customers that exist in the world, and there are a ton of enterprise customers. It's not necessarily that Walmart is bringing in something new, but it's making it more accessible. I do appreciate that. I don't want to downplay how important this is because anybody who works in technology or works with these apps. No, having a platform and then having a widget on that platform makes for a dramatically better experience than having to navigate to a site or a platform that is entirely separate than what your organization is already using. It's great to see the partnership. I just ultimately don't think that this is going to be something that causes a material difference for either

Walmart or Salesforce at the moment, but this is part of that larger transition that Walmart is having to saying, hey, we developed this technology internally, let's see where else we can get use from it. On Friday, we get the official start of earnings season with the big banks. Obviously, in the coming weeks, we're going to get a much clearer sense of how holiday retail went. I am fascinated to hear about Walmart's holiday season, what their results were like, in part because Walmart of the major retailers really was the outlier in terms of seasonal hiring. Their seasonal hiring was so much smaller than it had been in previous years and so much smaller than their competitors. I just think it's going to be fascinating

to watch. We saw last quarter was Walmart having that heavy focus on non-discretionary goods. I'm not overly surprised to see that they're a bit more tepid on the discretionary spending. I will say though, just anecdotally speaking, people I've talked to and the numbers that I've seen so far in terms of sales, I think might be better than investors are expecting, but I'll try to keep my expectations low as to not be disappointed. Emily Flippen, great talking to you. Thanks for being here. Thanks for having me, Chris. You can always get a bird's eye view of the economy, but if you want to see things

from a different angle, talk to some truckers. Jamie Harris is the Chief Financial Officer of RxO, a freight booking company. Ricky Mulvey caught up with Harris to talk about what his business saw during the holidays and how RxO is disrupting an industry that may surprise you. I want to talk about the freight brokerage business, especially in RxO Connect, which is a more automated, smart system. My understanding is that freight brokerage in the past had been a relationship-based business, where agents know what's going on with the truckers' families, their likes and dislikes in terms of routes. Truckers want to make sure that if they're driving out from Colorado to the

East Coast, that they're going to have a load that can take them back home. How have you been able to build trust with truckers on RxO Connect? Have there been issues with conversion to that more automated platform? This is still a very relationship-oriented You are totally correct. The history of the brokerage business is largely relational. What we bring to the brokerage business on a technology basis is we have those strong relationships because we have customers who have complex problems. And we combine that relationship that we have and the complexity of working through a tough situation with automation. So as an example, on the carrier side, if a carrier goes out on a trip from, let's just say, hypothetically from Charlotte to Dallas, Texas, our technology allows that carrier in Dallas to what we call find their way home much easier. So what they want to do, they want to run back home full because what a carrier has is the capital, the equipment, and they have time.

And if they're running on the road empty, then they are not utilizing their equipment well, which means ultimately for the carrier, less profitability. And most of our carriers are one to five trucks. Over 50% of our carriers have five trucks or less. And so we're able to help the carrier be more efficient, be more, you know, use their capacity better, which we believe helps them want to do business with us. And I think the other item, our technology helps carriers be connected with a shipper that they might otherwise never have the opportunity to do business with. So, as an example, we do business with 58 of the Fortune 100 companies.

We do business with 200 out of the Fortune 500. If you think about one of those 58 of the Fortune 100, how will they ever connect to a carrier who has five trucks or less for a certain route? And so by us being able to do that electronically, it gives that shipper ability to post-load demand on our network. And it allows us to help match that up with the carrier who's in that marketplace. And so, we think it creates efficiency in the transportation market. First of all, we think it creates efficiency for the shipper to meet demand much more effectively and cost effectively. And we also think it helps the carrier be more efficient with what they have to sell and provide, which is time and asset utilization. Speaking of your customers, many of them are in

the industrial sector. Some of them are retailers, including Costco, Dollar Tree, and Lowe's. Right now, they have an inventory problem, trying to clear excess inventory bloated from the pandemic. How are you seeing this play out at a ground level in terms of freight bookings? And then, what does this mean for your business? We do have a strong industrial base. We also have a strong consumer, retail, e-commerce base. We have a nice book of business in automotive space, healthcare, food and beverage. So, we cover a lot of verticals, if you will.

You know, as we look at the economy today, there's been a lot of press about consumer. As many of the transportation peers have said, we saw a muted peak season. We saw goods moving, but it was muted compared to some prior years. We have seen our other verticals remain strong. Industrial continued to remain strong. Automotive continued to remain strong. Health care. That being said, the economy in general, who knows what the economy is going to do over the next three, six, nine months.

We are constantly planning for different scenarios. We're listening to our customers. We do think and we do know that we have insights via our customers and via what we see on the load boards to see trends, you know, quickly. And while we're watching it very closely, for us, I can't get into current events, because we'll have earnings coming up shortly. But for us, we are continuing to see goods move, although at a muted pace compared to what we saw previously. One question I want to ask is about your long-term relationships. You're dealing with a very fragmented industry. The Wall Street Journal tech columnist Christopher Mims has

a wonderful book on logistics called Arriving Today, about just-in-time delivery. And he pointed out that there's 3.5 million truckers in the United States, while 10 million Americans have a commercial driver's license. There's a ton of cyclicality and there's not a lot of stickiness in terms of relationships in some businesses. What are you doing at RxO to encourage those long-term relationships with truck drivers and those small trucking businesses on your platform? Our economy as a whole is primarily a consumer-based economy. Transportation, as you know is the kind of the lifeblood of moving goods in our country. We believe our relationship management of our carriers clearly is paramount to our success because it gives us access and

capacity that others just don't have. It gives us the ability to react quickly, as we mentioned. We do several things that we believe create loyalty among our carriers to RxO. First of all, We mentioned a little bit earlier, our platform, our access to the customer base we have allows the transportation business, whether it's a person with one truck or five trucks or a company that has 100 trucks. But for especially that small driver or that small company, it gives them access through our platform to a customer base of shippers that they likely could never get access to without somebody like us. So we believe it helps them just from a pure running their business and being more efficient. And again, the only thing they have to sell is asset utilization, customer service, and their time. And if we can make their time more efficient, we can make their commercialization better, it actually helps them be a better customer service agent for their customers, which is also our customer. So we think that's a big plus.

The other thing is we have a rewards program, a loyalty program, if you will. we're able to go out and help negotiate we actually negotiate you know cost on a scale basis for things like maintenance tires fuel so we're able if you're one of our carriers you're able to participate in our rewards program and by virtue of that we actually help you you know run your business more cost effectively and so you know if you're a small small carrier say you're a carrier with five trucks, you can't buy some of those repair services or some of those supplies with the same level of purchasing scale that we can provide as a whole. And so we think that also, we know that also is a big advantage for reasons for carriers to stay with us for a

long period of time. And so we've had tremendous relationships with our carriers. A very large percentage of our carriers come back to us over and over for more business. And that's one of the reasons why we see the brokerage trends continue to move in our favor on a secular basis because we're able to react to swings in the marketplace and demand much, much more quickly than a transportation provider that relies purely on assets because they have a limited amount of capacity. Our capacity, we say, we've quoted before, we have over 100,000 carrier relationships, which is equivalent of about 1.5 million trailers that we can run. That's a lot of capacity for shippers who have big swings in demand from time to time.

Jamie Harris, he's the Chief Financial Officer of RxO. Thanks for joining us on Motley money. Thank you, Ricky. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.