Motley Fool Money - Back-to-School Stocks

Episode Date: September 16, 2023

Kids are expensive. Consumers are estimated to spend more than $100 billion on back-to-school shopping this year, according to the National Retail Federation. Deidre Woollard, Mary Long, and Ricky Mulvey got together to talk about companies that could ride the tailwinds of back-to-school season. They discuss:  Surprises from a survey revealing the brand preferences of college interns Why “experiential” spending could be the future, or failure, of one big-box sports retailer If chatbots killed the homework help business And six stocks that play to back-to-school trends Tickers discussed: MBG.DE, TSLA, META, GOOGL, UBER, LYFT, SPOT, AAPL, PYPL, DKS, TGT, SNAP, ELF, CMG, CHGG Host: Mary Long Guest: Deidre Woollard, Ricky Mulvey Engineers: Tim Sparks, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. Call me a pessimist, but I still think students are going to use their parents' money to pay for homework help. Sometimes you might want a human to help you prepare for a test, or when you have like a complex,

image-based problem that comes from a textbook. We'll see what happens. It's on my watch list. I currently don't own the stock, but I think it's one of the most interesting sort of canaries in the coal mine companies with regard to the generative AI story. I'm Mary Long, and that's Ricky Mulvey. I got together with Ricky and our fellow Motley Fool Money co-host, Deidre Willard, to talk back-to-school season and which companies could see a boost as students return to the classroom this fall. We discuss big-name brands that have won over the hearts of college interns, six stocks that cater to back-to-school trends, and some foolish wisdom for the students in your life. Somehow, it is September, and while many stores might like you to think that it's already Halloween and that the winter holidays are just around the corner, here at the Fool, we like to live in the moment.

the moment is still back-to-school season. So I'm here with Ricky Mulvey and Deidre Wollard, and today we're covering some companies that could ride the tailwinds of back-to-school trends. Those tailwinds also are pretty substantial. DeJy, you dug into some of the numbers from the National Retail Foundation. Just how big is the back-to-school market? Yeah, it's pretty big. Back-to-school spending expected to reach of $41.5 billion. People are expected to spend an estimated $900 each, and electronics is huge. 69% are expected to buy electronics. College students spending even more, an average of about $1,300 a person, which is up from last year. Since 2019, back to college spending has nearly doubled. And, you know, college spending is really interesting

because now there's the whole dorm room thing. There's just a lot happening there. And the other thing I think is fascinating is back to school. We're in mid-September. This started in like mid-July. It keeps getting earlier and earlier, sort of like the holidays. That's the case with everything. As soon as we can have a new transitional holiday, it's right there. And, you know, those are stats from the National Retail Foundation, but it's not just retail that gets kind of this boost from back to school. A mysterious listener shared a survey with us that wound up on our doorstep. It polls Morgan Stanley interns, about 80% of whom are between 18 to 23 years old, kind of about their preferred brands and different trends that they're seeing across a bunch of industries, basically what the

youths think? Ricky, you said you saw some surprises here. What from the survey stuck out most to you? I think the biggest surprise was how the interns view brands, one of which is that they see, at least for a car brand, Mercedes is more desirable than Tesla. I wonder how much of that has to do with some recent controversies around Elon Musk. But I think one of the appeals of Tesla is, is that it's the sort of the Apple brand of electric cars, right? And everything else is an Android I've heard in some cases. And then the other surprise for me is that Instagram is still by far the most popular social media app. When interns had to pick three that they use most often, Instagram had an 82% agreement rate.

By contrast, TikTok was at a third. YouTube was at a third. And Facebook proper was just at 4%. Another thing that stuck out to me in that survey, they asked about preferred ride sharing apps and like Uber versus Lyft, and Uber kind of blew lift out of the water. 85% of the respondents preferred that. Lyft took about 13%. To me, like on the one hand, that makes sense.

When I personally like go to order a ride share, I go to Uber first and then I check lift to see if it's cheaper. And if it's cheaper, I go with Lyft. And if not, I'll just stick with Uber. Uber's like the go-to. But I wonder how much of that is actually based on preference, how much of that is indicative of true loyalty or if it is just kind of a cost-benefit analysis. And also, how much of that might have to do with some parents footing the bill or having a perk or a relationship with one of those

ride-sharing services through a credit card or something and then linking their student up to that. And then because of that relationship, Uber becomes the preferred brand. Yeah, Mary, I think you touched on something important, which is it's difficult to build a mode if you have an immediate competitor that can price match or undercut your prices within just a few seconds. The thing with Uber, I think it allows teen writing. So maybe you have a little bit more use going on from that. These are interns who are presumably above the age of 18, but maybe they got used to a little bit of stickiness from being used to being on one app. Lift on the other hand, I think you have to be 18 to be a writer on the platform. We were talking about surprises in the

survey. I think there were some other things that were less surprising. Spotify is the go-to music streamer. To me, that made a lot of sense. Apple music is a distant second, but it's only pulling at about 22% of respondents. Again, I think back to like my own days in college. And I wonder when when the survey asks which music streamer are used to are you subscribed to, if even people that are using the free version of Spotify are saying, oh, I'm a Spotify subscriber. I know that like my first two years of college, I was eking by on that free subscription for as long as I could until the ads just drove me up the wall and I couldn't take it anymore. And so I wonder how much of that is playing out here. Other non-surprises for me at least were that Venmo took the cake when it came to like peer-to-peer payments.

77% use Venmo on a monthly basis. Zell kind of follows at 45%. But when it comes to paying for goods, Apple pay is the preferred method to use. And Apple's got a pretty tight hold on phones. I feel like that will be a surprise to no one. Biggybacking on the Apple thing, one of the questions they asked was about the Vision Pro. And if people were interested in buying that, they asked it in two ways. They asked it at the price that it is going to retail at around $3,000 and then at $1,000.

And the response was pretty muted. It didn't seem like even the price point didn't shift that. Most people said they weren't rushing out to buy it. So we'll see. It's interesting. Apple announced that their new iPhones will be shooting spatial video later this year. Maybe that shifts things. But so far, it does make me wonder a little bit about the Vision Pro.

Yeah, I saw that as well, DeJer. I don't know. I disagree just a bit. I'll just play devil's advocate. How about that? When folks were taking the survey, I would say at least 99% of them have not had the chance to use it, see what it can do, myself included in that category. I would be very curious if you had like a control group of folks who hadn't been on the Vision Pro and then a test group of folks who've gotten to demo at least one time and see how those responses may change. That sounds like a future podcast episode, Ricky. So in preparation for this episode, each of us went out, channeled our inner student, and then have brought back to the table a couple back-to-school stocks. This isn't so much a bucket as it is, like an idea factory.

And we've kind of separated those ideas into two distinct categories. One, companies that could benefit from like the return to grade school or high school, and another that's more targeted towards college students. So let's start with high school. Deidre, you looked at Dick Sporting Goods, ticker DKS. Tell us more. This is an interesting company. It's just, it's a company I really like a lot. And thinking about the trend to capitalize here, I would say is the growing interest in participation by women in sports is a growth area for them. A relatively large company about a 9.4 billion market cap. You know, a lot of retailers had lower sales last quarter, not dicks. I mean, not a great quarter. Sales up 3.6% in the second quarter about 1.8% comparable store sales. Their margins were down a little bit. One of the things that they're doing is they're getting,

deeper into experiential retail. So they've got these house of sports conversions where they're taking this large footprint and creating really experiential places to, you know, try stuff out and kind of play with the equipment. And they're saying that they're seeing already, even though they're just starting this, that they're seeing a lot more like sales per square foot from that. So that's something to like about them. Also, you know, with Dix, you don't get a lot of trade down. This is something where if you've got kids and they're in sports, you don't really have an option not to do it. So there is some safety there. And the company has really just had a steady growth.

It's got solid margins. You know, as much as I love the House of Sport thing, the only thing that I'm a little worried about is are they going to overspend on that? Because building out these experiential real estate things that are really cool is awesome. And it's great they're seeing results so far. but if they go too big, too fast, that could drag on margins. You don't want to bet against parents spending money on youth sports. Diedra, eventually one of them will make it to college on a scholarship, so really you're saving money. I grabbed what might feel like an obvious pick, Target, also known as Targe, also known as TGT.

And I pick Target mostly because it's effectively synonymous with Back to School in my mind. I have a bucket full of memories of it being fall and me being in grade school and like being so amped to go to Target for, yes, like ticking off everything on that school supply list, but also like shopping for a first day of school outfit. And I would hate to think that the age of Amazon has totally done away with that tradition. But also just that idea and experience of stepping into Target kind of speaks to something broader that Target itself knows exists and refers to even as the target effect, which is you go in with knowing in your heart and mind that you're going to get one thing

and walking out, having spent hundreds of dollars and with things, that you didn't even know that you needed, but will totally spice up your house. And as I think about that, I just kind of ask myself, like, what other places really have that kind of grip? We talk a lot about digital sales and digital storefronts. But Target, even, like, in COVID, saw an increase in sales, which is almost surprising, considering that it has such a large physical footprint. They've kind of tapped into e-commerce in an interesting way. Still using that as a mechanism to push people into stores, even today, like 95% of all their sales are fulfilled in the store. So even if someone is ordering something online, they're still getting into the store to pick it up, which again speaks to and caters to that target effect of, okay, we got them in for this one thing, but hopefully they'll leave getting even more.

Ricky, you snapped up Snap, the social media platform with the disappearing photos. What are you seeing here? Snapchat, I think, is an interesting trend. I will say that I do not own the stock, nor do I plan on ever owning the stock, at least at the time of this recording. I really thought this trend would die. I was completely wrong. It has 750 million monthly active users. It also has about 400 million daily active users. For context, Instagram is 500 million daily active users. I thought that was just absolutely incredible

because my user experience on it has been poor. One of the strangest features is Snapchat's Map, which is used by 300 million people per month. The daily map users open at 6. times per day on average. For some context, this shows you the exact location of some of your friends on Snapchat. And if you have friends on Snapchat, many of them are peripheral people. Folks, you have not spoken to in five plus years, maybe since grade school, maybe since your freshman stats class. And they have said, you know what, I am happy for everybody to see my location at all times.

A couple interesting things with the company. It became free cash flow positive in 2022. Stocks down from a high over 80. Now it's around $10. They really like issuing new shares and they spend about a third of their revenue on stock-based compensation. Maybe it'll bounce. Maybe it'll do something. I'm putting this in the bucket, though, of companies I just don't like. Some folks, odd snap, at least from the people I've seen use it, they use it in place of text messaging where you take a selfie and then you have like a one-line response to what someone has said. That sounds exhausting. Let's graduate and go to college, just as if it's that easy. Deirdre, for our college, idea factory. You took a look at ELF cosmetics, ticker elf. What's the story with this beauty brand?

Yeah, ELF stands for eyes, lips face. It's billing to both high schoolers and college students. The origin of this company was sort of like a wet and wild where you've got selling makeup for a dollar. They've graduated up now. They now sell makeup for, you know, in the $10 range. And they have grown by leaps and bounds. It's a company that's been around 16 or 17 years, but in the last three or four years, the growth has been incredible. It's now in the top five brands along with like the, you know, the OGs of the space, the cover girl, Mabelene, Revlon, all of those. 18 quarters of net sales growth. And for the most recent quarter, net sales up 76% year over year.

Gross margin is 71%. The growth has been phenomenal. The thing I'm watching with them, the trend is skincare and self-care. skincare is fascinating because it seems like it used to just like wash your face. Now you got you got to get the serum. There's got there's like five steps now for everything. They just acquired Natarium, which is a skincare brand for about 355 million. I'm wondering if they're kind of using the playbook that Estée Lauder has been using recently, which is like when you have a lot of money and and you need to keep on top of things, you just acquire those buzzy brands. Of course, Esty Lutter ended up shuddering a couple of those. but I'll be interested to see if that's sort of the next step for ELF. They do very well at Walmart, at Target, at ALTA. Growing their loyalty plan program a little bit, kind of a weak spot for them, just around $4 million.

I mean, you compare that to Alta. They've got like $41 million. I mean, there's a lot to love about the growth, the wide distribution, the price point. I don't own this one. I'm not sure I would want to dive in at this point because I'm afraid it's a little bit overpriced. You've got a P.E. ratio of around 76%. They're spending a lot on marketing. They just had their Super Bowl commercial last year. And with brands like this, you have to wonder if it falls out of fashion, what happens and how fast could all of that growth go away?

But for right now, it's an incredible growth story. I am a self-professed salsa obsessive, so I don't really think I had any choice here but to go with Chipotle. Reason being when we think about back to school is that college towns actually play a pretty outsized role in the success of a lot of particular Chipotle locations. Management talks about this pretty frequently on earnings calls. And in fact, during COVID, when a lot of campuses kind of shut down and emptied, Chipotle saw a huge dip in sales at these kind of at these college town locations. Again, this is something that they've, that management has mentioned frequently. Small town Chipotle's, which college town chipotle is kind of a part, tend to come in a bit below average restaurant margins, but the cost structure

is a bit more favorable there. The thing I will flag when it comes to Chipotle is its valuation. Part of the reason for that is that the stocks historically been a pretty strong performer in the past 10 years. It's shot up over 350%. In large part, because of that, it's been viewed as pretty heinously expensive. The average PE ratio has been about 82.6 over the past 10 years. And because of that, even if you like the business, it might be kind of hard to bite the bullet and buy. These days, it's trading closer to 48.2 times earnings. That's still steep if you look at it in comparison to something like a McDonald's or a Starbucks, which is closer to 26, 29, respectively. But compared to the historical average over the past 10 years, it's a bit easier to stomach. So something to keep an

eye on. Ricky, last but not least, you looked at Chegg, which I primarily know is the website that sometimes has the answer to an essay question. Yes, Chegg has a subscription service, which is we will generously call Homework Help. They also do textbook rentals. And I think this is an interesting company to follow because this is really the quarter. This is the year that we're going to find out if chatbots killed the Homework Star. It's a pretty simple narrative. No one wants to use Chegg anymore because you can get all those answers from chat GPT. I don't know if the narrative's quite that simple. It went from a trailing PE ratio of about 75 to 8. It's also now at about an eight times price to free cash flow.

which is deep value territory for any kind of company. You know, call me a pessimist, but I still think students are going to use their parents' money to pay for homework help. Sometimes you might want a human to help you prepare for a test or when you have like a complex, imaged-based problem that comes from a textbook. We'll see what happens. It's on my watch list. I currently don't own the stock, but I think it's one of the most interesting sort of canaries in the coal mine companies with regard to the generative AI story. So before we go, let's close out with a wee bit of foolish wisdom.

What's something you wish you did or didn't do while at university? So I went to Ohio State, go bucks. It's pretty simple. Listen to your gut. When you're in college, this is the first time where you're going to have complete freedom to make choices that you used to not be able to make. Very often your gut kind of knows best, whether it's a bad class, a bad friendship. It'll tell you what you should be doing a little bit more than you may give it credit for.

I'm going to go really practical and say, you know, watch your spending. in particular, watch what you spend on food and learn to cook for yourself. One of the things that can really eat up your budget when you're in college is like all that pizza and Chipotle and everything else. It's a tradeoff between moving off campus and missing out on some of the college fund, but moving off campus and making your own food and things like that can save you some money. And I'll kind of go academic. I so often wish that I took more varied classes. I feel like I showed up at college and was like, I'm going to major this and do this. And was so set on like checking the box that by my fourth year, I remember looking around

and thinking, oh my gosh, I can just take French because. And like I can take a class to learn to code because. And I felt like I just realized that as I was about to leave and didn't realize the uniqueness of a liberal arts environment where you have so much knowledge right at your fingertips. It sounds perhaps very adult to say, oh, I wish I had taken more classes, but I wish I had taken more classes. 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 stocks based solely on what you hear.

I'm Mary Long. Thanks for listening. We'll see you tomorrow.