Motley Fool Money - From The Frozen Tundra To The Beach

Episode Date: December 4, 2023

A proposed merger between Alaska Airlines and Hawaiian Airlines could help Alaska take market share over time. (00:21) Jason Moser and Deidre Woollard discuss: - The possibility of the Alaska Airlines and Hawaiian Airlines deal going through. - If airlines lose specialness as they grow. - The race to bring GLP-1 drugs to market. (18:35) Deidre Woollard chats with Solo Brands CEO John Merris about the company’s collection of brands and where it could be headed next. Companies discussed: HA, ALK, AMZN, DTC, PFE, RHHBY Claim your dividend stocks here: www.fool.com/dividends Host: Deidre Woollard Guests: Jason Moser, John Merris Producer: Mary Long Engineers: Dan Boyd, Desiree Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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Two state-named airlines, one big merger. Motley Full Money starts now. Welcome to Motley Full Money. I'm Deidre Willard here with Motley Fool analyst. Jason Mozer. Jason, how's it going today? Hey, Dieter, doing well. How about yourself?

Doing well. So yesterday afternoon was all of a sudden a go-to-your-computer moment for me because a big merger in the airline world was announced yesterday. They had a conference call and everything. So Alaska Airlines and Hawaiian Airlines, they're combining in a deal worth around $1.9 billion. You know, the first thing that came to my mind was, wait a second. We've already got a deal going on with JetBlue and Spirit, and they're fighting the DOJ. Is this one going to happen?

Well, yeah, that's a good observation. I mean, JetBlue and Spirit, definitely is not a done deal to this point, right? Still in court, I think, just wrapping that up. I do think, I feel like the jet blew in the spirit, it could have an impact on this deal. I don't think it will, though. And the main reason why, I think the jet blue and the spirit deal, there's certainly a greater, there's greater implications on the value-focused consumer where that deal is concerned, I think, right?

Those are two airlines that are very clearly focused on the value consumer, which is great. You know, you want that. You want that market that can scratch every inch, so to speak. So, I think from that perspective, these deals are different enough, right? Alaska and Hawaiian aren't necessarily as focused on that value-oriented customer as they are about the geography of the locations that they serve. And those locations are unique. I don't know that it's necessarily something that impacts that value-focused consumer as much. So I think from that perspective, they're different enough. I feel like this deal probably has a better chance of going through.

Certainly, it shouldn't go through the same scrutiny. I think that the JetBlue and Spirit deal are going through now, but by the same token, hey, listen, anything going to happen? That is something we've learned. But yeah, you make a good point there because with the JetBlue and Spirit thing, you have that overlap on routes, and you don't have that as much with these two. And the other thing is also is that, you know, Alaska is sort of the distant fifth at this point to the major airlines, although this deal doesn't.

make it, could make it if it happens, of a closer competitor, even though it's still relatively a niche player. Yeah, I mean, you look at these airlines put together. I mean, the merits here, I think, they make a lot of sense, right? They are pro-consumer. I think it's pro-competitive. I mean, think when you look at these two combined, you would have 1,400 flights per day, only 12 really areas of overlap there.

So, I mean, you're having something where you're not having to get rid of. a ton of redundancies, right? It does feel like it just makes this entire network more valuable. They'll be able to expand the unique locations served. And ultimately, I think an important part of this is that they're really going to be able to broaden the international portfolio over time. I mean, when you consider where these two locations, I mean, Alaska and Hawaii, right, I mean, these are areas that really open up a whole new side of the world that, that, you know, that, you know, maybe they wouldn't have necessarily had the opportunity to pursue otherwise. I mean, they did put some numbers around it feeling like this could result in $235 million

potential synergy savings. That even seems like kind of a low number when you look at the context of the deal. And I think a lot of that really boils back down to the fact that this is not something where they're eliminating a lot of redundancies. It does seem just more to make the entire network more valuable. And I think that's important to note. Yeah, yeah, I think that that is important. I think the other thing with this one too is, you know, it's a different kind of airline thing too because you've got, I mean, these airlines are very, very niche and they're very sort of particular. One of the things that I think about with Alaska is, you know, they talked about minimal disruption, so that's a good thing. But they talked about what they learned during the Virgin America acquisition. I really liked Virgin. I like their safety videos. I like the vibe. And, you know, Hawaiian Airlines, I don't know if you've ever traveled on it, but there's, there's

a Hawaiian spirit to it. There's the, there's the whole Aloha thing. I don't know. I worry that this is, that there is going to be that loss of character. What do you think? Well, there could be, but I mean, I'm glad you made that point because I think there is something to that. I think, you know, on the one hand, a lot of us, I mean, when you're just talking about domestic travel here in the contiguous 48, right? I mean, just airlines are just a commodity. I think for the most part, Right? People just want to get from point A to point B at a reasonable cost. And they're not so worried about the identity or the culture or the vibe as the kids these days might call it. Right. But it is something when you look at Alaska, when you look at Hawaiian Airlines, I think, you know, COPA Airlines is another one that stands out to me. And that's just because, you know, we used Copa when we flew to Costa Rica and back. Right. There's an identity associated, a brand, sort of a feeling. that I wouldn't say is necessarily a competitive advantage, but it's a differentiator.

It's neat. It's nice. It's something that I think makes the traveling experience a little bit more fun, a little bit more adventurous, a little bit more memorable. And so I do think, you know, it's important to know, both CEOs feel it's very important that when this, assuming this does happen, they want to maintain both brands. They want to maintain both identities. They're not looking to really, you know, create some sort of hybrid here. it's just a matter of utilizing the scale to better serve people. And so I think that's something they'll make sure to focus on is continuing that distinct identity

that they both have built up through the years. Yeah, and I think the vibe matters less when, it matters more when you're on vacation. It matters less if you're just taking a flight that you have to take for business or business travel or something like that. I mean, it's just different. But, you know, there are, it made me nostalgic for the, for the, for the brink. brands that we've lost. Because there were some airline brands, some little niches that I loved. Like, when Delta had song that used to run from Boston to Florida. Like, I love that.

Like, there was a very particular vibe to that. Are there any that you remember that you just, like, loved? Like, did you like Eastern way back when? I can't believe you said, because I was going to say, that is exactly the name I was going to point out here. And I don't know that I would look at Eastern as being so unique. maybe in its time, I guess it was. But I definitely have fond memories of Eastern Airlines back in the day. And the reason why, ultimately, is it's the first flight I ever took by myself. No parents.

I was like five years old. I flew at Greensboro and North Carolina to go visit my grandparents. I was on my own. I mean, this was a really big deal. It was a life event for me, a life event for my parents. I mean, I was five, and I still remember it vividly. When you asked that question, that Eastern was the first, first one that popped in a mind. I can't believe you said that.

I remember because I grew up in Boston, and I used to be able to take the shuttle to visit my aunt in New York City and it. And it was one of those things where they would actually take your credit card on the plane. Like you could just get on the plane. It's crazy. Well, the New York Times had this opinion piece related to the JetBlue and merger. And it said, the headline was it, the bigger airlines get the worse they become. What do you think? Is that accurate? But there's probably something to that. I mean, that maybe goes back to that sort of brand identity and focusing on that niche sort

of customer that you're serving, like the experience, that vibe, whether it's Hawaii or Alaska or Central America, whatever it may be. Yeah, I think the bigger things get, you know, they lose a little bit of that touch. I think that the airlines, retail restaurants, I think that that's just, you know, one of sort of the unfortunate things that comes with growth in many cases. Well, the market hasn't really loved this for Alaska. Obviously, they loved it for Hawaiian. But one of the things that I was thinking about with this was not just the commercial side

of this, but Hawaiian has this partnership with Amazon. I think it was announced last year, this relationship to ship packages, which they kind of needed at the time. It was material to their business. less material to Alaska's business right now, but maybe there's a possibility there that this becomes actually a bigger part of it. And that actually might be really good news for Alaska, like down the road a bit. I think it could be. I mean, when you look at the nature of this deal from the get-go,

I mean, I agree. This is something that's more important for Hawaiian that it would be for Alaska. There's no reason it shouldn't continue, though. I don't think. I mean, when it was announced, I believe it was late 2022. I mean, there's an eight-year contract. I think aircraft are provided by Amazon. I think it's interesting to note, I mean, there are some costs associated with the relationship that will be ultimately pass-throughs for Hawaiian, like high margin revenue for Hawaiian, I think, in this case, like certain costs like fuel, for example, fuels a pass-through for them. So, I mean, this is something where Amazon is really getting in there and offering a lot of support

to be able to make this happen and requiring on, relying on Hawaiian sort of expertise. and their hubs, their network, their ability to be able to get things to places in a timely manner. I don't think this is anything that really prevents that relationship from continuing. And I agree. I think that when you look at the combined entity, I absolutely can see a world where Amazon would want to expand this relationship. Because ultimately, this is something that I think will give these two airlines, if they're combined, It will give them a greater international presence with new markets served. Well, I mean, listen, Amazon is all about new markets served, right?

I mean, they're looking for as many markets as they can find. So I think this is something where it wouldn't surprise me at all to see the relationship with Amazon ultimately grow if these two do end up combining. Well, and also, Amazon, as part of that deal, they got a stake in Hawaiian. So that starts to become more interesting as you go down the road a bit. Warrants to acquire up to 9.4 million Hawaiian holdings common shares over the next nine years. So yeah, it's going to be interesting to see how that all shakes out. Yeah. Yeah, for me, that's the wild card in this deal.

Like the rest of the deal is like pretty standard. We see these things with airlines all the time, but that was the part of the deal that made me sort of get a little more excited about it. Oh yeah. Yep. Absolutely. Well, I want to switch over to talk a little bit about another M&A Monday, which is the deal for for Roche, the pharmaceutical company, to acquire Karmat therapeutics for $2.7 billion in cash, which is really interesting considering they've only, I think, equity invested in it is about

$385 million. So this just seems to me like, boy, everybody wants in on these GLP1 drugs. They just got to spend to get it. I mean, with Karmat, you've got, they're working on both the oral and the injectables for type 2 diabetics with obesity. And also one of them is for type One, this just seems like everyone just is like rushing into this space right now. Does every major drug company kind of need to be targeting this right now? You know, this seems like the AI of the pharmaceutical industry. Right. Yes. You've got AI. I mean, Farm obviously is going to tell you they're using AI for everything

that they're doing as well. And they are. But this does seem like the AI sort of hype for the pharmaceutical industry. They're all clamoring for presence in the space. I mean, I I understand why. We've talked about the numbers before, but when you look at the data, if you get 40% of Americans are considered obese, you get 7.7% that are considered severely obese. Over 30% of Americans considered overweight, right? And that, all of that leads into, I mean, the challenges with diabetes and whatnot. So, I mean, it does, yeah, these companies are all trying to figure out an opportunity, at least, right? Because this is not an opportunity that's going to last forever. And so clearly, it's a problem. They're looking for ways to solve

it. And so it's not surprising to see Roach get in here and actually make this bid. Yeah, it's interesting. So you mentioned AI, and I'm thinking about these two cycles, and I'm thinking about the ways that they're similar and differ. So the way that they're the same is obvious. Everyone's trying to figure out the angle, tons of money flooding into the space. But with AI, your biggest risk is probably like maybe oversupply of certain things or over investing in areas. It seems to me with investing in GLP1 drugs, you've got this other risk, which is, you know, anytime you invest in biotech in a drug, it's like, what if something happens? What if all of a sudden, you know, we're so new into this.

What if something is discovered? It causes cancer or there's other symptoms. I mean, we've heard already of like certain digestive symptoms and pancreatitis and things like that. As an investor, you see these two cycles. How do you kind of think about the risks with that? Well, I mean, I think it's a difficult situation because they're looking at a solution. They're looking at essentially sort of a long-term solution to a serious problem. Right.

But they don't necessarily have the data to support whether it actually is an effective long-term solution. Right. I mean, when you talk about using these types of drugs on an ongoing basis, and that's what it is, really, in many cases here. It's kind of, this is becoming sort of a lifestyle thing. And, like, this is going to be something that you as a person will need to be doing for the rest of your life. They don't really have a lot of information as to how many of these drugs will actually impact you using them for 5, 10, 15, 20 years and beyond. And so from that perspective, I mean, it does feel like, you know, making. this acquisition, getting karma, they get at least a pipeline with some potential candidates.

Because a lot of these companies, you're either hitting a home run or you're striking out. There's kind of no in-between. It either works for a dozen, right? So Roche is getting three distinct drugs in the pipeline that are going through trials right now. You get CT388, which is a phase two-ready drug. 996, which is phase one, and then in CT-868, which is phase two. So they're going through the process, right? And that's great. That's what you want to see. But that's not the end, right? I mean, just getting them cleared, then ultimately they need time to understand the data. And the only thing that cures that is time. Now, hopefully, I mean, they discover the drugs that

more challenged earlier on, and they're able to kind of eliminate those from contention. But it is a very, very difficult process to get through. And just a really, really tough one because there's so many different potential outcomes with so many different potential drugs. I mean, it just, the possibilities seem endless at this point, which is both a good thing and obviously a challenge anything as well. Yeah, yeah. It's interesting because that happens for last.

week with Pfizer, they're testing a GLP1 pill, and they've got a twice daily one that they're testing and a once daily one that they're testing. The twice daily one, the side effects were too great. And that just tanked the stock. So, you know, it is injecting a little, pardon the pun, it is bringing a little more risk to these companies in that they're now really, really tied to this a bit more. And with a $2.7 billion acquisition, that is a very big bet, and that could go really well or not so well.

It is. And, you know, they're playing the odds. They feel like with that size of a deal, I mean, you're getting that pipeline. And I mean, that's really the nature of these kinds of deals. You're not necessarily looking for the certainty, but you're looking for the pipeline that will give you the best opportunity for a more certain outcome. And I think that's what Roach feels like they're getting with this deal. And given the pipeline there, It seems like a reasonable assumption. Yeah, I think so. Well, thanks for spending this M&A Monday with me, Jason.

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Solo Stove recently made headlines for its viral stunt with Snoop Dog. I sat down with John Maris, CEO of Solo Brands, to discuss the company's unique collection of brands and where the company's headed next. To talk about the brand umbrella, and let's start by talking about what Solo brands is, because you've got a variety of different, really kind of eclectic products. You've got the fire pits and the stoves, which are very popular. you've got clothing, you've got kayaks and paddleboards. I was trying to find a link here, and I feel like it's like a strong social presence, sort of upstart beloved brands and also

lifestyle focus. Is that sort of how you view it? Yeah, absolutely. And maybe said differently, the two kind of commonalities that I tend to center around are first and foremost that these are brands that were all digitally native. So they all started out as e-commerce businesses first, and then kind of rolled into a retail component and have some element of that. But there was kind of a center around e-commerce and around building direct relationships with customers that we really liked. And then the second one being that all of these brands are very focused on experiential, putting smiles on faces, making people's lives a little bit better via those experiences.

So we really like the smiles experiences component to it. And then obviously, you know, our ticker is DTC. see, that's the ticker we trade under. We're very focused on that direct-to-consumer relationship and being able to drive that relationship directly with the customer. Yeah, interesting because they are sort of, I would describe them as enthusiast brands. So Solo Stoves has really become popular, people like it. But these are also sort of, these are one-time purchases, except for the Chubbies, although I know with Solo, you've got accessories and things like that. I was curious about that because now you've moved into

the pizza of a category, which is a category that didn't really exist that much a few years ago. And now it seems to be a very popular category. I mean, people do love their pizza. How do you discover shifts like that when you're trying to build businesses? Because it seems like some of these businesses you've actually found an opportunity where there wasn't really one before. Yeah, it goes back to what I was just describing on that direct-to-consumer relationship. because most of our transactions, especially in our first decade, came through e-commerce as a channel, we had this one-to-one relationship, and customers were giving us feedback all the time,

sometimes indirectly, just through the way that they're purchasing, but oftentimes directly. They're saying, gosh, like, we found this product and it's really cool. So a customer might find, you know, a backyard pizza oven product, but then they would have a frustration with it. Like, it does this really well, but it doesn't heat evenly. And Solostov should totally look at this. And so what happened is, is we would just start listening to customers. And then ultimately, that would drive us into new categories. Pizza is obviously the one that you highlighted. We just recently in the last couple of months launched basically the Solostove modern day version of a patio torch that a lot of people, you know, have seen in the past.

This is like a basically like you stake it in the ground and it's literally like a torch you put gel fuel in and it's citronella and it's an insect repellent. It's an ambiance deal and burns for five hours. But this is just customers like super frustrated every year. They were having to change out their torches and they're like, so well, stuff, everything seems to last longer. Could you guys design something? And so most of our product innovation has come from and our category expansions have come from customers telling us categories that they want us to play in. You mentioned earlier that your ticker is DTC, so direct-to-consumer, but your business is sort of, your business is actually really evolving into multi-channel.

So tell us a little bit about what's happening there and how you're thinking about that balance of that direct-to-consumer business, which has been really strong and also this new sort of emerging wholesale business. You know, so often direct-to-consumer is referenced as a channel versus a relationship. The way that I think about DTC or direct-to-consumer is more as a relationship than a channel. When I think about channels, e-commerce, retail, wholesale, marketplace, even corporate for us has become a really meaningful channel. These are all channels, but what's interesting is that we have found that via intentionality, we actually have been able to build direct relationships with customers through all of those.

channels. They just look a little bit different. For instance, with our wholesale or retail partners, when a customer purchases a product in the store, we now are finding ways to drive that customer back to our site, to register product, to follow up with an accessory purchase, to receive a free gift, and ultimately continue to still drive a new relationship, a direct relationship with a customer, even though their first entrance to the brand came through a wholesaler or a retailer. So somebody asked me recently, do you plan to change your ticker? You know, like, is DTC going to be irrelevant now? And the reality is, is my quick answer was, I've learned never to say never, but relationship is going to continue to matter. That direct relationship with the customer is going to continue to matter

to us in a meaningful way. And regardless of the channel dynamic of where we're selling or bringing that customer in for the first time, we're still going to be very, very focused on driving a direct relationship with a customer regardless of that channel. So as you get deeper into these relationships, on your recent earnings call, you talked about, Dick's sporting goods, your growing relationship with Target, what are you looking for in a retailer? And are you seeing variations by region or by product? Yeah, there's two main focuses whenever we're going into a new retailer. The first one is, does it build brand equity? And what I mean by that is, one, is it a retailer that when a consumer equates that retailer to our brand. Is it going to build the brand?

Associated with that is we think about it in a big way like traffic. Like we do traffic on our website. You know, we can pay for traffic via digital marketing expense or we can partner with a retailer who gives us broad exposure in a big way to eyeballs. Take Target as an example. This week, we'll launch in 2,000 target stores roughly across the entire U.S. US with a solo stove product and merchandising strategy, all of that traffic that's flowing through the stores are now going to have eyeballs on solostove in a new way. And many of those customers are not online shoppers. That's a big brand awareness play for us.

The second component for us is we want to meet the needs of the customer. I've been talking about this, but the importance of the customer being able to have optionality and find us when they want us, where they want us, and making it convenient for the consumer to interact with our brand is really important. Retailers are helping us do that in broad scale. So those are the two things we're focused on is brand building and brand awareness slash traffic, and then ultimately meeting the needs of the customers by being where they are when they want us to be there. I know another thing that you've been pursuing within this wholesale effort is the kind of like the shop-in-shop strategy.

And I've been fascinated by this studying retail because now it seems like, you have these two things. You have putting things in stores, getting shelf space. That's one thing. But then there's this other thing now of having stores within stores, designated area, designated branding. I'm seeing more and more retailers pursue this, you know, Target, which we've talked about. But, you know, Macy's everywhere seems to be really doing a lot more of this store within a store strategy. Sounds like that would, that's probably, probably a good, like a tailwind for you, right? Yeah, absolutely. It is. is interesting. And like you said, it's two very different things. It used to be you just

fight really hard to get into a new retail partner, and then you're just on the shelf, right? And then over time, maybe you fight your way towards closer, closer towards that in cap. Now, it's becoming much more experiential. And I think retailers have figured out at the end of the day, retailers are looking at revenue per square foot. I mean, that is an important metric that they follow. And via both case studies, even with our own brand, but obviously across many brands in different retailers, they're finding that their revenue per square foot actually can go up even when they offer more square footage, what might be considered less efficient real estate because they're these bigger displays. They actually are driving more revenue per

square foot within those displays. So these are important metrics. We're watching them closely and making sure that it's merchandise the right way. But we do feel and are seeing that consumers enjoy being able to come in and experience a brand in a different way, even within a retailer, and it's driving better purchase activity and behavior in those shop and shops. So we're hopeful in 24 that we're going to continue to expand in several more of those shopping shops. So thinking about this strategy right now as you're growing and potentially acquiring, how do you balance that with debt and being a young company, needing to take advantage of

opportunities, but also needing to be responsible as a publicly traded company. You've got a lot of different things to sort of keep in the air there. How do you think about that? You know, we've had the good fortune to have very little debt on our balance sheet relative to our even generation. We've been a profitable business since the first year we started as Solostove in 2011. And we've been very cash generative during that time as an e-commerce business. So when you, put those metrics together or those qualities, those business qualities together of EBDA positive and cash flow positive, it puts you in a stronger position to be able to open up doors for opportunities and make decisions not necessarily based on your liquidity capabilities, but more

based on what's best for the business. This year, we have talked quite a bit about how much cash, you know, we plan to be cash flow positive on the year. And it's, and it's, and it's impressive. So this is a business that is very profitable, you know, in the, in the mid to high teens from an EBAA perspective. And this year, generating at or right around the EBAA level of cash as we're generating an EBDA on the year. So that's putting us in a great position. We're less than, I think we're right around 1.6 times lever from a debt perspective. So very low debt leverage and planning to be at or below one-time's lever by the end of this year. So we're in a very strong cash position. We have great liquidity, and as we see,

opportunities will continue to find ways to invest in long-term growth. Last question for you. If everything kind of goes as you hope and your strategy goes along, what does solo look like in five or 10 years? Yeah, you know, it's a business. We've talked a lot about our international expansion efforts, but this is a business that we see tremendous potential to create a household brand. You know, there are brands out there that we admire a lot. You know, one that comes to mind that's just down the street from us down in Austin. We're up in Dallas is Yeti. They've done a fantastic job building their brand, building brand awareness. I'm not sure what their unaided brand awareness is,

but I would imagine it's quite high. Ours is still very early in its story. I think five to 10 years now, our brand is much well better known, as popular as our products have become. There are still so many people that don't know who Solo Stove is as a business or especially any of our other brands. And so we're continuing to drive that message and build more brand awareness. But this is a company that has a potential to be well into the billion dollar plus revenue range, continue to be profitable and continue to be innovating great experiential products for our customers inside and outside. 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 ourselves stocks based solely on what you hear. I'm Deidra Willard. Thanks for listening. We'll see you tomorrow.