Motley Fool Money - E-Commerce Overreached. Now What?

Episode Date: October 11, 2022

It's hard to argue with a headline like "The Great Post-Covid Online Shopping Bet Was a Costly Delusion", but we're going to anyway. (0:21) Bill Mann  discusses: - Why the investments Amazon and Shopify made were not a "delusion" - What to watch for among online retailers this holiday shopping season - Inventory management being the metric to watch in early 2023 (11:13) Mark Kantrowitz is an expert on saving for college and author of "Filing the FAFSA". Robert Brokamp talks with him about some of the most common errors people make when applying for financial aid. Got questions about stocks? Call the Motley Fool Money Hotline at 703-254-1445. Stocks discussed: AMZN, SHOP, W Host: Chris Hill Guests: Bill Mann, Robert Brokamp, Mark Kantrowitz Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full-service experts. We've got a closer look at the e-commerce landscape and a few tips on paying for college. Motleyful Money starts now. I'm Chris Hill joining me in studio. It's Modley Full Senior Analyst Bill Man. Good to see you.

I'm not tired of that, actually. Neither am I. In studio. And I must say, as chilly as it has been in this room, as we've been here in the past, it is delightful in here today. It is. Someone, not you and not me. Someone fix the temperature in the studio, and it's no longer like a meat locker, which is

Whoever is involved on our side of the thermostat battle is up one at the moment. Hopefully, wherever folks are listening, the temperature is just lovely where they are as well. Let's talk about online retail, shall we? Because you would point it out a Bloomberg article to me. And I don't put, and I don't think anyone puts Bloomberg in the same category as the New York Post when it comes to headline writing. And I'm not saying they are. But it's pretty straightforward when you have a headline like, the great post-COVID online shopping bet was a costly delusion. I know. It does.

There's some heat to that headline. There's absolutely some heat to that headline. And as someone, as you are, who has been involved in providing content over the years, you do know in practice that headlines sometimes don't really give. you the whole story. And the reason why they're written that way is to get people to click on them. I don't love the word delusion in this case, because I think a delusion means that something that was done in 2020, that had no chance of succeeding. And basically, the article is saying that all of the growth that happened in 2020 and 2021, in online retailing, because of the

pandemic, has essentially reversed itself. And so you have stocks like, Shopify that as a result are down 80%. You have Amazon, which has lost half a trillion dollars, which I'm assured, even in these economic times, it's kind of a lot. Company after company after company that made bets, I mean, Peloton, my goodness, that made bets on online retailing being something that people would never return to the stores. People are returning to the stores in their droves. There are a couple of things I want to unpack here, and I'm glad you mentioned the use of the word delusion, because I had the same reaction.

I get that this was costly. Absolutely, this was costly. That's the right word. I don't think it was delusional. It may have been misguided in the optimism, and that's something that the article digs into the data around people returning to stores, and something we were talking about right before we started recording, which is the concept of inertia. out inertia, but just sort of old habits die hard. And as convenient as online shopping is,

particularly if people are cooped up in their homes for one or two years, when they get the opportunity to get out, more than a few of them are going to say, yeah, in the before times, it was a hassle to get in the car and go shopping somewhere. Now it feels like an outing. Yeah. I'm going to try and describe a graph, which I know is really, really, really great audio. Great audio. But if you look at a graph of online retail sales, there is obviously a pretty rapid spike in 2020. And then it's drifted back down. And the graph basically says that we are at about where we would have been in terms of online sales had the trend just continued from 2019. And in fact, online sales is up about 3% from

from 2019, which is, it's up. It's absolutely up. But the investments that were made along the way have not paid off. You know, and you've got CEOs like Toby Ludke from Shopify saying these investments didn't pay off and it was my fault. I don't think it was his fault, because we don't, we can't, we have to give ourselves the grace to know that what happened with the pandemic wasn't necessarily what had to happen with the pandemic. We could have, in a really, really dark world at this point, still be primarily in our houses. We could have been shut tight. That's true, although I'm going to push back on Luke because he's the CEO.

Yeah. And as a shareholder, even though my shares are underwater, I appreciate when he came out and he was like, yeah, this is on me because I'm the CEO. But I agree with you, there's planning for a version of the future that fortunately did not come to pass. So where I want to go is where you think we are with some of these retailers. Because I think that in the case of Amazon and Shopify, in particular, both of them, two varying degrees have come out and said, yeah, we overinvested in these areas and we're

pulling back from that. I don't think either one of us or probably anyone who's paying attention think that, either of those companies are going away. The question is, well, what will it take for them to rebound and therefore for their stocks to rebound? I was about to say on the flip side, but I shouldn't assume it's on the flip side. We have Amazon, Shopify. Then there's a company like Wayfair. I'm not a shareholder. I am a customer. I've had good experiences with Wayfair. Wayfair fits the same category that in terms of e-commerce, stock, down over time, spiked in 2020, all that stuff.

But Wafer is in a business that, you know, it's not, they're not selling mattresses. It's not a, you know, this is a once every 10 years type of product. They have a lot of different things. But after you've bought some new furniture, how many years are going to pass before you're buying more? And I'm wondering, when you start to look at the e-commerce landscape, do you start to separate some of these stocks into categories. And one way of slicing them is, okay, these are going to be fine. It's just a question of when these others, I'm going to watch a little bit

more closely. Yeah. Well, so Wayfair very, very heavily levered towards two things. One was furniture sales in general. Duh. Furniture companies levered towards furniture sales. What happened a lot in 2020 and 2021 is that people started redoing their spaces. But it's also levered towards the housing market. And the housing market itself has pulled back. You're exactly right to point to it as being an e-commerce company, but it's not one with a huge amount. It's not fast turnover goods. So I imagine with Wayfair that one of the things that they're paying attention to do now is just the fact that they had clawed forward revenues, that they may have.

gotten any way down the road. The company's actually in okay shape. I mean, as much as any company whose stock is down 89 percent can be. But the other interesting thing to me, if you think about how spending has happened this year, and this is the most interesting thing to me about where we are, because a lot of people believe that we're in a recession, a recession is coming. But consumer spending has been healthy. But in 2022, it has been more, you know, much more about bits than atoms. People want to be out of their houses. They are spending on experiences, the very same experiences that they didn't get in the last two years because everything was closed or things got pushed down the road. So I hate to keep saying this, because I think

at some point it becomes a little bit silly. But we have to remember that 2022 is a bit of an echo boom from two of the weirdest years that I hope we will ever have in our lifetimes. How much does the upcoming holiday retail season, how much should it affect the way we think about these? Because it's easy for me to imagine, put aside the earnings season we're about to be hit with, it's easy for me to imagine, fast forward to January, we start getting, particularly from businesses like Amazon and Wayfair. We start getting results and details on how the holiday quarter went for them. It's easy to imagine thinking, like, okay, the worst is behind

them. Not only is the worst behind them, but another thing that's going on right now is that a lot of these companies, I mean, the one that we think about the most has got to be Peloton, which is in the process of essentially undoing all of the growth plans that it had. But a lot of companies are sitting on huge amounts of inventory. In inventory, if you think about it in a business perspective, it has a cost associated with it. It's got storage costs. It's got all sorts of things that aren't just, well, it's been made but not sold. So I think that when we're talking about the weirdness, when we come to the earnings reports that will happen in January going into February, the inventory numbers are some of the things that are going to be most interesting.

They might not come with great revenue numbers, because, as you know, the easiest way to fix an inventory problem is to discount. But I think for consumers, it's going to be a pretty good holiday season in terms of pricing out there. And then I'm hopeful, as a citizen, as a person of Earth, as a person who is fascinated by markets, that we begin to hit more of a steady state in the beginning of the new year. Bill Mann, great talking to you. Thanks for being here. Thanks, Chris. Students across America are prepping their college applications. Parents of those students are thinking about what it's all going to cost. And if you're the one writing the tuition check,

you might want some help paying for college. Mark Cantorwitz is an expert on saving for college, and he joins Robert Brokamp to discuss some of the most common mistakes that people make when applying for financial aid. So let's start with that free application for federal student aid, better known as the FASA. So as October 1, students and parents could fill the first. it out and submit it for the 2023-24 academic year. So what is the FAFSA and why should folks file it as soon as possible? The FAFSA is a financial aid application form that provides access to money from the federal government, state governments, and most colleges and universities. You should fill out the FAFSA

as soon as possible on our after October 1st, which is for the next fall financial aid, because some of the forms of financial aid are awarded on a first-come, first-served basis. This includes not just state grants in 15 states, but also some federal aid and some college aid. And some colleges have very early deadlines, or they have two deadlines, a preferred deadline and a regular deadline. And students who file the FAFSA sooner, on average, get twice as many grants as students who file it after three months have passed. So, who should or shouldn't do the FAFSA? I imagine some folks might be listening to this and say, you know what, I make too much money. I'm not going to even bother.

If you could afford to pay for college using pocket change, then you probably don't need to file the FAFSA. But the FAFSA not only provides access to gift aid, grants and scholarships from the colleges and the government, it also provides access to student loans and student employment. The student loans are relatively low cost, and they have lower interest rates. They're a good way for the student to have skin in the game because of the annual and aggregate loan limits. You probably won't end up borrowing more than your starting salary.

So the FASA could be rather extensive. It has more than 100 questions, though you likely won't have to answer every question. It takes about 30 to 60 minutes to complete. That means there's plenty of room for errors. So, let's discuss five of the most common. So error number one, reporting retirement assets or the family home as an investment. Although retirement assets and the family home are technically investments, they're not reportable investments. The FASA ignores the net worth of qualified retirement plans, like a 4-1K,

4-3B, IRA, R.R.A, ROTA, SEPP, Pension plans. It also ignores the net worth of the family's principal place of residence. If you include these as investments on the FAFSA, it's going to significantly reduce your eligibility for need-based financial aid. This is one of the most common, serious errors involving the FAFSA. And I should point out that this is for the FAFSA. There are some schools that have different rules, some follow what's known as the CSS profile. There's about 200 private schools. Now, for that, you often do have to report some of these assets. Right. And you do report retirement plans on the CSS profile. It isn't always clear whether

the colleges are using that information. They might use it only if you have exceptional assets or income in other ways. And they do require most of the colleges that use the profile for you to report your family home, but some of them will cap it at two to four times income so that your home equity that's built up over decades won't eliminate eight. eligibility by as much. Got it. So let's move out to error number two. Reporting 529 plans incorrectly.

So if a 529 plan is owned by a dependent student, that's called a custodial 529 plan, or by a dependent student's parent, it's reported as a parent asset on the FAFSA, and then distributions, qualified distributions, are ignored. Do not report a custodial 529 plan account that's owned by a sibling, because, you know, because that's owned by the sibling and you only report that on the siblings FAFSA, not on the student's FAFSA. Now, if a 529 plan is owned by anybody else, a grandparent, aunt, uncle, or non-custodial parent, if the parents are divorced, it is not reported as an asset on the FAFSA, but distributions

are reported currently as untaxed income to the beneficiary, the student on the FAFSA. Now, the question that's used to report this, the cash support question, is going to be dropped in 2024-25 as part of FAFSA simplification. During FAFSA simplification, the number of questions on the FAFSA will drop by about two-thirds from 100 to about three dozen, and that's one of the questions they're getting rid of. Now, who owns the 529 plan can therefore have a big impact on aid eligibility. If it's reported as a parent asset, at most 5.64% of the asset value reduces aid eligibility. If it's currently reported as a grandparent asset or aunt-uncle or some other third parties asset, the asset value doesn't reduce aid eligibility, but distributions can

reduce aid eligibility by as much as half of the distribution amount. Yeah, there's a couple of things there. First of all, just as a general principle, for financial aid, principles, eligibility, it's always better to be something to be considered a parental asset than a student asset, because student assets are factored in more. And then you talked about that simplification, president. That came from a law in 2020, but none of those changes will take place this year, right? This is the last year of the old regime, correct?

Right. So the Consolidated Appropriations Act of 2021 implemented, FASA simplification, something that Senator Lamar Alexander had been lobbying for, well, campaigning for a very long time. And because he was retiring, it was kind of a going away president for him that this policy objective that he cared a lot about was finally implemented. It was supposed to go into effect this year in 2023, 24, but the U.S. Department of Education said that they wouldn't be able to implement it that quickly, and so it's been delayed to 2024-25. Got it. And then to highlight the other thing you pointed out, that distributions from like

a grandparent owned 529, those can have a harmful effect on financial aid. So what you should do is use that money for later in the kids' college career rather than sooner, correct? Correct. And you could even wait until after the child graduates to take a qualified distribution of up to $10,000 to repay student loans. It's a lifetime limit. it per borrower. So, you can take $10,000 to repay the students' loans, the beneficiary's loans, and for each of the siblings, an additional $10,000. And if you change the beneficiary to be the parent, you can use it to repay parent-plus loans. But this is across all 529 plans. So you can't use multiple 529 plans to get beyond that $10,000 limit.

Got it. Let's move on to error number three. Reporting the Wrong Year's Income. So the FAFSA is based on two-year-old income information to enable the use of something called the IRS data retrieval tool. This is also known as prior prior year income. So for the 2023-24 FAFSA, it's going to be based on 2021 income. Now, even if you know what your 2022 income is, maybe you wait until January to submit the FAFSA, I don't recommend waiting, you can't substitute 2022 income for 2021 income. And you also can't substitute 2020 income for the 2021 income. You have to use the correct year. Now, if your income has changed,

maybe through job loss or a pay cut, you should contact the college financial aid administrator at your college to ask for a financial aid appeal. The college financial aid administrator, has the ability to substitute any 12-month period for the period required on the FAFSA when there are special circumstances. And job loss and pay cuts are among the most common special circumstances and also the most likely to be approved. All right. So error number four, incorrectly reporting student or parental marital status.

Well, sometimes the parents decide to file the FAFSA. on behalf of their child to take care of it all, and they answer both the parent questions and the student questions. This is a big mistake because parents often get confused about whose questions they're answering. I've seen parents start to FAFSA with their own FSAID instead of the students' FSAID, and that's as though the parent is applying for financial aid to go back to college themselves. And some of the more common problems that occur is they'll sometimes swap their own Social Security number without the child or their marital status with that of the child,

or they'll swap a sibling for the child, or they'll get the date of birth wrong. This is why it's really important for the student to complete their portion of the FAFSA and the parent to complete theirs. But sometimes they will swap the answer the student marital status question as though it's a parent or vice versa. Also, marital status must be accurate as of the date the FAFSA's filed. Sometimes, well-meaning parents will file the FAFSA on behalf of a child who's about to get married, thinking that they're going to take care of this for them. But a student who's married is considered to be an independent student, and that change can have a big impact on aid eligibility,

and sometimes the student is intentionally delaying filing the FAFSA so that it can reflect their new marital status. And you can't anticipate a future change in status. So if you're getting married tomorrow, you can't file the FAFSA today as though you're married, or vice versa as divorced. Let's get to our final error, choosing to not use the IRS data retrieval tool. Okay. So the IRS data retrieval tool will transfer information from your federal income tax returns into the FAFSA. And this not only increases the accuracy of the FAFSA by avoiding many common errors, like entering cents for dollar amounts.

If you do that, you might be multiplying your dollar amount by 100 because it ignores the decimal point. And sometimes you have copying errors or digit transposition errors. It transfers it directly from the federal income tax return. and any data element that is transferred from the IRS to the FAFSA is assumed to be correct and is not subject to a process called verification, where you have to provide the source documentation for every data element on the FAFSA or certain selected data elements. This significantly reduces the chances that you're going to be selected for verification.

It used to be as much as a third were automatically selected for verification. More recently, it's been 18% because many more applicants are using the IRS data retrieval tool. And, in fact, if you use the IRS data retrieval tool, the odds of being selected for verification are in the single digits. So that is going to save you not just money because of greater accuracy, but also time and hassle dealing with verification. All right. So let's get to the final question for you, Mark.

And that is, what is your best overall advice when it comes to get? the most financial aid? So, I have three key tips. First of all, minimize income during the base year, that prior prior year upon which the FAFSA is based. So if you're going to realize capital gains, offset them with capital losses. Don't take distributions from retirement plans. Even a tax-free return of contributions from a Roth IRA will count as income on the FAFSA. And increasing your income has a big impact on aid eligibility.

Second, apply file the FAFSA as soon as possible on or after October 1st. And then finally, appeal for more financial aid if your family's financial circumstances are in any way unusual. That could be a change from the prior prior year to the present or anything that distinguishes your family from the typical family, such as high unreimbursed medical or dental expenses, high dependent care costs for a special needs child or elder We parent, private K to 12 tuition, anything that's even a little bit different is worth asking for an appeal.

The worst that can happen is they just say no. Well, Mark, this has been super helpful. Thank you so much for joining us. You're welcome. 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.