Motley Fool Money - Split Your Burrito and Your Stock

Episode Date: March 20, 2024

Chipotle’s epic run makes it the latest big name to split its stock, we talk about why its good for the options market and why Chipotlanes and breakfast are still huge levers for CMG.    (00:13) Tim Beyers and Dylan Lewis discuss: - Chipotle’s historic 50-for-1 stock split and why the burrito-maker still has plenty of growth ahead of it. - Apple and Google-parent Alphabet’s talks to bring Gemini into the iPhone, and why it’s a no-brainer for both businesses.  (13:48) Motley Fool Money’s Mary Long caught up with Lauren Sherman, a fashion correspondent at Puck to talk about Abercrombie and Fitch’s turnaround and epic 2023. Companies discussed: CMG, AAPL, GOOG, GOOGL, ANF Host: Dylan Lewis Guests: Tim Beyers, Mary Long, Lauren Sherman Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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You can split your burrito. Why not your stock? Motleyful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst, Tim Byers. Tim, where are we out on the caffeine meter? Fully caffeinated, ready to go, really, really hungry for a burrito. You're going to have to make it through this episode. I think it's going to be a little hard. We are talking splits in the food business, including a zoom-in on Chipotle's stock split,

the next generation of famous tech partnerships, perhaps, and an apparel brand that is sneakily one of the best stocks of 2023. We're going to start with the Brito talk, though. We'll get your hunger pangs over with early here, Tim. All right. For the first time in the company's history, Chipotle will be splitting its stock. This week, the company announced a 50-for-one stock split.

And I don't know if that number caught your eye, Tim, but I think that is one of the largest stock splits I have ever seen announced. I've never seen one bigger than that. I mean, I've seen in the teens, but I've never seen one bigger than that. I mean, I've seen 10 for one before, 50-for-one. No, I've never seen that, and it provides a huge amount of liquidity to the market for Chipotle shares when this completes. So you'll be injecting way more shares into the daily average volume, which our colleague

and friend Jim Mueller will tell you is very good for making an options market in Chipotle shares. So stay tuned to hear Jim talk about that, probably on the discussion boards. But I think this is very interesting. It just creates a more liquid market for Chipotle. Certainly, if you're a longtime Chipotle shareholder, you're going to suddenly look at your brokerage statement in a few weeks and see a whole heck of a lot more shares. Nothing's really happened. But I think it is an acknowledgement that the demand for ownership in Chipotle is probably higher than it's been in a long time. And that's because it's a good business. It's a good business.

Yeah, few companies could have a 50-for-one stock split even make sense with their share price. And we know, yeah, it's kind of an academic thing. It's a matter of pizza, right? Do you want two pieces of a pizza cut in the eighths or one piece that's been cut in the quarters when it comes to, the stock split outside of the options market. I think for us, Tim, it provides an awesome opportunity to just reflect on how amazing the company performance has been, particularly over the last decade. Revenue doubled since 2015. Net income basically tripled since 2015. And along the way, they have basically been able to become one of the best in class in terms of mobile. One of the best in class in terms of a rewards program. They've weathered

consumer food issues. It doesn't seem like there's been anything. that's been able to stunt the growth of this business, and they continue to be really the industry standard and fast casual. I would agree with that. I mean, the only other that I would say competes with them in terms of restaurant level economics would be like a Chick-fil-A. Chick-fil-A is absolutely outstanding. But I would say those two are really one and two and pick who you like better between those two. The interesting thing with Chipotle is they still have really, room to grow. There are still ways that Chipotle can expand its business. We're still very early, for example, Dylan, in the rollout of what we call Chipotle lanes. So that's the drive-up.

I mean, Chipotle has done all this amazing growth by being a business with locations that you walk into and you assemble your burrito or your bowl or whatever it is that you are ordering. And that's been driving the business for years, for years. And now, Chipotle lanes are starting to take off here as we grow the total restaurant footprint. So we could probably still double the number of Chipotle's here in the United States. But what we could do beyond that is take existing Chipotle's and put more Chipotle lanes on them. So I think the growth story here, Dylan, would be that the volume of business per location that Chipotle can do is still on the low end of what we have seen. So think about that. If you have a Chipotle lane with a Chipotle and

Your restaurant level activity can maybe, I'll make up a number here, could be up by 50%. That has dramatic network-wide effects for a system of company-owned stores that isn't fully optimized. That is bonkers. And this has been such a high-performing stock. To think about that, the only question is how much of that is priced in. and I would say probably some of it because it's a premium price stock, but also probably not all of it, probably nowhere close to all of it. You anticipated one of my questions there. I mean, we are looking at this now at an $80 billion company.

Yeah. And yet, most recent quarter, comps grew 8%. Despite the incredible footprint and how mature a lot of their restaurant footprint is, they are still performing. It seems like you still see growth ahead on the volume side. I have underestimated this business and its future growth to my own detriment. I sold roughly a 10-bagger ago back in 2017, missed out on a ton of gains. I'm curious, is there anything that you see emerging as a risk or something that could go wrong in the Chipotle growth story? Well, there's no question.

I mean, it's an increasingly digital business. So if you ruin things on the digital side of the business, if you somehow figure out a way to screw up digital ordering or the app, gets hacked or you just have bad experiences that make you want to order somewhere else. Like, that's it. I don't want it. You know, that could really harm things. You could have another health scare. That's certainly something to watch out for. And you could also play really poor games with the balance sheet. You could decide you expand irresponsibly. You take on unsustainable levels of debt, for example. And then you build out in all of the wrong ways and then you have to retrace, maybe sell locations. So there's a lot of things that could

go wrong here. But I think what we've seen from Chipotle, at least more recently, is that they are responsible in how they figure out growth. As long as they stick with, here would be the signal to me, Dylan. If they're going to continue to do incremental things that have asymmetrical benefit, I think we're fine here. So something that fits that. category of something where it's an incremental change that can provide asymmetrical benefit is something we've all been waiting for. Where's the breakfast burrito, Chipotle? Where is it? Breakfast Burrito? Where is the breakfast burrito? Because you've got the Chipotle lanes. That is the perfect place to make an incremental menu change that could dramatically increase volume, if done

right. But Chipotle has a history of not rushing into these things, which I think is right. That's a very conservative use of capital in order to be able to grow responsibly. So as long as they keep on that path, Dylan, I think we're fine. They can make incremental changes that give you asymmetrical benefit. If instead, you see a lot of all-in bets, maybe let's pump the brakes a bit. I love that you answered my risks question with basically, by the way, they still have breakfast burritos in their back pocket as a growth lever, just in case you forgot. Right. Tim, our final story in our news roundup segment for today, Apple and Google Parent Alphabet have a deal in place when it comes to search defaults on the iPhone.

Why wouldn't they explore something similar in AI? We have reports out that they are in talks to use Google's Gemini to provide generative AI and other capabilities in Apple's iPhone. My immediate reaction to this, Tim, is, are you surprised Apple isn't trying to home grow any of this? No. They almost never do that. I mean, they will do some homegrown things, but generally what they'll do, if they're going to make a tuck-in piece of technology, they'll do an aqua hire. They'll buy a small company that has some really interesting technology. They'll buy them out. They'll bring in the people, and then they'll build it into their ecosystem. But they, I mean, they do partnerships all the time. They've done it for years. And in this particular, case, they have a long-standing partnership with Google, but here's the hot take I have for this. It would be surprising if Apple didn't do this, because here's what you get. This is nothing to do with Gemini's technology. Honestly, I think it has zero percent to do with Gemini's technology. You know, it has the answer to what this has to do with is money. This is what happens when you are a

company with a massive, massive balance sheet. In this particular case, I'm talking about Alphabet. Alphabet can absolutely afford to pay Apple whatever Apple wants to make Gemini the default AI on iPhones. They are buying distribution, which gives them time and data to improve Gemini using one of the largest networks, data-gathering networks in existence on the planet today, which is the iPhone network, which is amazing. So I think this is an incredible deal for Google. They've got the money to pay for it. They have the existing relationship. And for Apple, it's just more money in their pocket. What do they care? They know that it's early in the AI development. You don't have to have a perfect AI. No one's expecting that. And here's the thing. For Open AI, which has a lot of bargaining power, they are exerting some of that. It is more

expensive to use GPT4 now than was to use GPT 3.5. You think GPT5 is going to be any cheaper? No, it is not. And you think Apple wants to be subject to whatever terms that Microsoft, which has leverage over OpenAI, wants to impose on Apple for getting GPT onto that phone. You think Apple wants any piece of that? I think the answer to that, Dylan, is no. So this is a no-brainer. Anyone that's surprised by this, I think, isn't paying close enough attention. To your point on the dollars there, we've seen through filings that Google reportedly paid somewhere in the neighborhood of like $18 billion to be the search default on the iPhone. I think that was back in 2019. So we can only imagine that sticker price for that has gone up. And being the default when it comes to generative AI

will also go up. I look at this news and I think about how on this very show, we have talked about some of the missteps with Gemini. Yeah. And they've been very public. They've gotten a lot of scrutiny for that. And I almost think, you know what? This lets Google pave right over those if they want to. A million percent.

And let's remember, Gemini is, it's, Google is getting hammered more than any other company that has a beta would get hammered because we expect more of Google. Like, we've become so dependent on the, the Google machine and we expect it to be good, that if it was, if Gemini was from another company and it was labeled as a beta, we wouldn't give that company nearly as much stick as Google has been getting for Gemini because we'd say, yeah, it's a beta. It stinks right now. It's going to get better. But Google doesn't get that grace because it's Google. Now, having said that, it has been

bad. It is the definition of a bad beta. But yes, this is what happens, Dylan. When you can write massive checks that allow you to fix problems, look what happens. You write big checks and you get distribution. And I will tell you, that distribution and the amount of data that Google gets access to by virtue of that distribution is going to help Gemini evolve in a big, big way. I cannot predict that it's going to be as good as the GPT model, but this is a good step in the right direction for Alphabet. And they got the money to do it. So, and Apple, they know that they've got the leverage here. So you can bet that Tim Cook has just got Apple and Apple shareholders got paid. They got paid. Tim, always love getting your take on tech. I'll set you loose

so you can go get that burrito. Thanks for joining you. me today. Thanks Dylan. The old adage goes it isn't what you say, it's how you say it, because to truly make an impact, you need to set an example and take the lead. You have to adapt to whatever comes your way. When you're that driven, you drive an equally determined vehicle, the Range Rover Sport. The Range Rover Sport blends power, poise, and performance. Its design is distinctly British and free from unnecessary details, allowing its raw agility to shine through. It combines a dynamic sporting personality with elegance to deliver a truly instinctive drive. Inside, you'll find true modern luxury with the latest innovations in comfort.

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Explore enhance offers at Rangerover.com. Coming up, one of the best performing stocks of the past year is nowhere near the tech sector. My colleague Mary Long caught up with Lauren Sherman, a fashion correspondent at Puck to talk about the Abercrombie and Fitch turnaround. Lauren, I want to start with the story of Abercrombie and Fitch. In the investing world, and honestly, maybe outside of it, too, the name on everyone's lips has been Nvidia, Invita, Invita. So it might be surprising to know that in the past year, Abercrombie of all companies, has outperformed this chipmaker. It's crazy. It's crazy.

So I'll give numbers to back it up in case there's anyone doubting me. But the retailer's stock is up 375% compared to a year ago. Invidia is up about 270%. My question for you, what's been happening over at Abercrombie? So as I'm sure you know and we all know, retail is very cyclical. And so a retail stock can be doing really well for five years and then doing really poorly for 10 years because the consumer is just not into the pair of pants that a brand is selling. But a couple of years ago, Abercombe totally changed its strategy.

It was always sort of relying on heritage to be cool with teens. So the idea was, let's make it really preppy. And in the 90s and 2000s, when Mike Jeffries, that CEO sort of turned it around, he made the preppy cool heritage into something that was also sort of sexy, It was kind of creepy when you're thinking about teenagers, but it was very like the Bruce Weber, black and white photos, and it became iconic, really popular among preppy teens, doubling up polos, things like that. And then in the 2010s, as the consumer world changed and there were just more brands, more direct

to consumer brands, there was just way more competition. Teenagers backed away from Amber Cromby. They were shopping at places like American Eagle, one of them. Abercrombie's biggest competitors, but also fast fashion, Zara, H&M, as well as places like Brandy Melville, just teenagers had way more options and they just didn't care about this sort of idea of preppy heritage done in a modern way. And so at some point, Abercrombie board hired this woman named Fran Horowitz, who long-time retail executive, grew up at L Brands, which was like the big company that owned Victoria's Secret and at one point also owned Abercrombie,

but Abercrombie was spun out in the 1990s. He hired this woman Fran Horowitz, has a very good reputation for merchandising. She fired a bunch of people and she decided, I'm really going to focus on product that is, she knew she wasn't going to beat out the fast fashion players with speed to market. So she decided what are the things that an Abercrombie should be doing? doing really well from a product perspective. And let's forget about the preppy heritage stuff. So Abercrombie made jeans.

They made plaid shirts. They made all of polo shirts, all this stuff that was sort of known. And they did it through this preppy heritage lens. She threw that all out the door and just made really cool jeans, really cool plaid shirts, really cool sweatshirts and stuff that actually the TikTok generation really loves. So I actually walked into an Abercrombie probably six months ago. in Abercrombie in Southern California and in the suburbs of Los Angeles. And you look on Iraq and there were all these sort of blazers in pastels, which were very

trendy a few months ago. And it said in a printout paper on the rack, it said, as seen on TikTok. So she just really went in and forgot about the heritage, forgot about the brand. It's sort of the opposite of what brand building 101 would teach you. She just forgot about that stuff and decided to make really good product that people would love. And the jeans in particular, which are super cheap also, have just become so popular among teenagers, yes, but also people up into their 40s are into these jeans. They fit really well. They look good.

They're modern style. And more than anything, she just got the product right. And it is, even with all that, I am still amazed at how well the stock has done and also how well the business itself has done because it's not easy to maintain that kind of momentum in retail, especially now, as I said, with so much competition in the space. Yeah, I mean, you mentioned the jeans. What got me interested in this story was that truly every time I complimented one of my friend's jeans, they would go with a look of kind of can you believe it on their face, they would say they're Abercrombie. and scoff a little. Totally. Because, you know, and you make this point that that can you believe it face came from the fact

that in my memory, Abercrombie was this preppy heritage brand. And what Fran's gotten right is that shift in style, as you mentioned. But I think what's also impressive to note is not just like addressing a change in taste over time, but also like Abercrombie not that long ago was kind of hated and was going through a lot of PR trouble. In 2016, they had the honor of being designated America's most hated retail brand by the American Customer Satisfaction Index. In 2022, I think, Netflix released this white-hot documentary that highlighted the very exclusionary marketing and hiring practices of the company. How low was the low point in terms of like brand perception for Abercrombie?

Well, I think one thing to remember is that Americans love a redemption. story. So going that low and coming back so high, I'm not totally shocked. The Americans love to bring someone back from the brink. But, you know, I would say with consumers, it was really, really disliked. And with a lot of these mall brands that were really big in the 80s, 90s, 2000s, most of them just kind of lost touch with reality. And I would say Abercrombie and Victoria's Secret, which used to both be owned by Reefatessen. tail magnate, Les Wexner, they both in the mid-2000s, they had marketed themselves through the male gaze. So the idea of what was sexy, what was interesting, what was attractive,

was, you know, could verge on a level of misogynistic. And so especially with Abercrombie and the CEO Mike Jeffreys, there were just a lot of things he said. At one point, he made a comment that like they just weren't going to ever do extended sizing because it was supposed to be an aspirational brand. Victoria's Secret, same thing, no extended sizing. And in the mid-2000s in sort of the height of the Me Too movement, that just no longer flew with consumers. And so I think people were just generally disgusted by Abercrombie.

All that being said, the way consumers talk and the way that they consume, are different things. Like I've been covering this industry for 20 years and people rarely vote with their dollars. We think they will and they say they will, but they actually don't. And so what it comes down to,

it's a price value equation always. If there is a product that is really, really good and you are able to find that product and you think it's good for the amount of money that it is sold for, then you will buy it. So they were pretty hated, but I would say that what it comes down to is that can flip so quickly that if you're making something good that people like, they will easily forget about all the bad stuff that

happen. So how do you, if you're an executive at Abercrombie or another retailer, how do you keep, not just keep a pulse on what the consumer currently wants, but also get a sense of what is coming around the corner so that you're not left behind. when trends and styles do change? Well, it's next to impossible. And if you talk to a retail executive now, they'll say they use predictive analytics and AI, et cetera, et cetera.

I got to say it's not that different from 1985 when the retail CEO would call the store at the end of the day and say, how many units of such and such item do we sell? And you have to kind of have a sense, the AI and the analytics can give you the algorithm can give you a sense of what's going to happen next, but you really don't know. And what you need to do is get your business in a place

with the right amount of inventory, the right amount of product that if you have an off-season, which you are going to have an off-season, then you'll be okay. What ends up happening a lot is if a retailer has a really big hit, they'll buy too much of it, and then they get left over with it when it's not cool anymore. So what I think Fran Horowitz has done is she's just been very thoughtful about watching the market and what people want.

Like you think about this gene that has done so well at Abercrombie. It's not a skinny gene. And you hear all the other retailers talk about their jeans, even up until a couple years ago, they were like, we're going to stick with skinny jeans because they're selling really well. But the reality was people were looking for something a little bit more relaxed. and with a wider leg opening. So Abercrombie got on that very early. I bet the first couple seasons of that gene

that everybody's wearing, it didn't sell super well, but they realized that that's where it was moving. And I think the challenge and the goal is to sort of be a little bit ahead and understanding of where the consumer is moving while maintaining the hero products and making sure that your inventory on the stuff that's selling really well is not crazy. Because then next season, when a new product is popular, you can really ramp that up and go wild on that.

And, you know, she's just done a really, really good job. There are not that many great merchants working in retail now. It does require right brain, left brain and a lot of instinct. And that is scary to people who are trading on the public markets. Like you're you're you live and die by the quarterly report and Doing something on your gut that's risky is not something that you want to communicate to shareholders So she's she's she's I mean it's it's wildly impressive and every every quarter I'm just like why wow because the whole idea has always been Maintain your brand ethos and your brand DNA and that'll see you through but what we're finding is that in

this current reality, that may not be true. Abercrombie reported Q4 earnings in early March. And on that call, Fran Horowitz mentioned building out a new segment for a wedding guest, kind of a more formal line. She also said, quote, there is no finish line and we see tremendous growth ahead. That finish line, there is no finish line. That's what's interesting to me. Apart from this step into formal attire, what are you hearing about Abercrombie's next steps?

So the whole thing I'd say the chatter among retail executives is how long, how long can this last? So no finish line. I mean, good for her. But so I think it's interesting because she's positioning it as more formal wear for weddings and things. But what I would say, and look at any retailer trying to get into the wedding space and never works. They always end up backing out of it. But what I will say is there is this sort of pseudo return to dressing up. Vanessa Friedman just wrote about this in the New York Times. I was just at all the fashion shows in Europe and everything is very polished.

The return of the dress. Like a dress, it's so funny to talk about, you know, items that we have millions of in our closets. But think about how when was the last time you wore a dress? I barely wear dresses anymore. I used to wear them constantly. It feels like it's time for people to wear dresses again. The miniskirt was really big for a few years and now feels like it's coming back to like dress era.

And so it's interesting because I think what she's saying is people are going to start dressing up a little bit more. By no means do I think people are to stop wearing jeans that people aren't going to wear leggings every other day. That stuff, the casualization of our culture is here. But I would say that we will see occasionally people making an effort to dress. up a little bit because we're really out of the pandemic lockdowns now. It's been four years since the pandemic. We've had spikes of people buying stuff and stopping and starting and stopping and the economy up up and down. Say now it's going to sort of go back to normal of how people dress up and

what they wear. And so I'd say that there probably is an interest in buying stuff that's a bit more formal. We saw it first with the return of the blazer and blazers with jeans, but now I, I would say that it's going to be dresses. And so she's positioning it as like a formal wear thing. I'd say it's probably more just women are going to want to wear or people are going to want to wear dresses more. And so she, I mean, she's, she's one of the few great, great retail executives working today. And it's, it really is remarkable what they've done. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so no buyer sell anything based solely on what you hear.

I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.