Motley Fool Money - The Lipstick Effect

Episode Date: May 19, 2022

What's the Lipstick Effect? So glad you asked. (0:25) Maria Gallagher discusses: - TJX defying the recent trend of retailers struggling - How TJX can potentially smooth out its results in good economic times - Why she thinks beauty companies are the best examples of "Lipstick Effect" stocks Plus we take a call from Bryan in Kansas City and talk about how to evaluate which stocks in your portfolio might be good candidates to add to. Got a question for the show? Call our hotline: [phone] Stocks discussed: TJX, HSY, LVMUY, EL, PG, ULTA, UL Host: Chris Hill Guests: Maria Gallagher Producer: Ricky Mulvey Engineers: Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream Season 2 of Marvel Television's Daredevil Born Again on Disney Plus. Deciding which stocks in your portfolio you should add to is a common dilemma. We've got a couple ideas to help.

Motley full money starts now. I'm Chris Hill joining me today from the financial capital of the United States of America. Maria Gallagher, thanks for being here. Thanks for having me. So the last two days on this show, we've talked about retail. And to a large extent, the way retail appears to be melting down, it's one of the last two days. one thing for unprofitable software company stocks to get hit. It's another thing to see established large retailers like Target and Walmart get hit the way they got hit. You and I were talking

earlier today, and I think I made a comment like, yeah, it looks like all of retail is just melting down. And you said, well, actually, there's TJX, which is a company we rarely talk about on this show, but TJX is actually, it's a company. Is it thriving? Is it an overstatement to say that T.J.X. is thriving right now? It's doing well. So their net sales last quarter were 11.4 billion up 13%. Their Marmax comps store sales. So Marmax is a combination of T.J. Max, Marshals and Sierra were up 3 percent over 12 percent sales increases last year. Home goods comps were down about 7 percent. So in total, U.S. comp store sales were flat over a 17 percent increase last year. So that's

really quite impressive to maintain those. elevated numbers. They ended the quarter with $4.3 billion in cash. We're seeing a lot of inventory fright and delivery pressure in a lot of these other retailers, but TJX didn't really talk about it that much. It didn't seem to be hitting them quite as hard. Their incremental fright pressure hurt their margins by about 2%. Wage pressure hurt their margins by a little less than 1%. So that pressure, I think, was less. And Wall Street responded pretty positively to that. And I also think that TJX is classified as something called an inferior good, which I don't like the name because I think- Wait a minute. I'm sorry, that's the category for TJX? No, if you're talking about

economics, you talk about the different classifications of good. So I think TJX would be called something called an inferior good. I don't think it is, but that's the economic term, which is just a good that when that demand drops for it when the economy is doing well and demand increases when the economy isn't doing as well. So you have things like bargain stores or places where you go when when you're making more money, you probably won't go there, but when you're making less money, you will. And so I think that's also kind of a positive indicator of people are saying, inflation is going to continue to be high. We're going to continue to see recessionary patterns in spending. I think TJX and some of these other kind of bargain brand places will be a place

consumers will continue to go. And so I think both of those things combined helped it be better received by Wall Street. It certainly seems like this could be a contributor. contributing factor to what we heard earlier this week from Target, because part of Target's success over the last few years has been their apparel. They've done a good job investing in their own lines of apparel, and part of the pothole that they just hit had to do with really stumbling in their apparel division. And I'm wondering if this is sort of an ongoing concerned. And I don't want to just single out Target. You could pick other publicly traded apparel companies out there and say they are at risk as well. But I never really thought of TJX as

being that level of competitor against Target and, you know, Gap, American Eagle, all those others. But that's probably incorrect thinking on my part. So I think the thing that's really interesting about a store like TJX is that when people go in, they're going in to browse a lot. So they're not going in for such specific things. And so I think that that really helps them in terms of people are going in. They know that they're going to get a good deal. They know that they have lots of different options. So when you're thinking about things like inventory, shipping times, I don't think that that qualifies as much for TJX as it might for some of these other stores where you're looking for Gap specific brand.

When I go into TGX, I'll say, whatever the brand is, I just need a new pair of pants. or I just need a new shirt that kind of looks like this, and they have lots of options. So they did see that consolidated inventories on a per store basis is up 35%. So they do have a lot of inventory. And so I think it'll be interesting to follow the next year or two to see how that inventory, how people are responding and going into TJX and comparing to places like Target. I'm not suggesting that TJX needs to dramatically change its business plan. But this conversation is making me wonder, what can TJX do to, look, we're in something

of an economic downturn right now, whether we're in a recession or not at the moment remains to be seen, or if we are in one later this year, or in 2023. But at some point, we will come out of this downturn. And if your TJX, if history is any guide, that seems to indicate. you're in for a rough patch. When you look at their business, do you think there are things they can do to sort of smooth that out so that when the economy turns for the better, TJX is not looking around saying, where did all of our customers go? Yeah, I think that's a great point. I think that they work hard on creating a good brand name.

I know everyone knows what Maxenistas are. I think that they create a good amount of loyalty. I think kind of pushing that to make consumers keep them top of mind is pretty important. And I think with a lot of these brands, you want to be top of mind for multiple things. So the fact that they have T.J. Max and Home goods, they want you to think of them, whether it's shopping something for your new apartment or shopping for new outfits. And I think having all of those things kind of in one place, it's very rare that you see a T.J. Max not very close to a home good. So having that all top of mind for customers, I think it will continue to increase that loyalty. I'm going to show my age and cultural ignorance. I did not know what a Maxinista. Is that what you said?

Yeah, a T.J. Maxenista, like a fashionista, but you like deals. When you and I were talking earlier today, one of the things that came up in the conversation was the lipstick effect. And for those unfamiliar, this is a term that refers to when there's an economic downturn, consumers are still going to splurge. They're still going to spend money on a little indulgence here or there. It's an economic downturn. So they're not indulging in big ticket luxury items, but a little splurge, such as nice lipstick, so hence the name, but it also applies to consumer-facing companies that tend to be resilient during an economic downturn. Where do you think this applies? I mentioned this to the college student in my house this morning,

and she immediately said, oh, candy. And I looked, shares of Hershey, up 13% year to date while the overall market is down 17%, which among other things means I should probably go to my kid for more stock ideas. But what do you think? I think candy is a great one. I also almost immediately went to Trader Joe's, getting a nice little fancy snack from Trader Joe's. But I will also do some literal interpretations and talk about the beauty market. So 71% of U.S. respondents from a recent survey are planning to spend as much or more on beauty and enhancement products in 2022, as they did before the start of the pandemic. So the beauty industry generates over $100 billion in revenue worldwide.

Makeup sales were down 22 percent during the pandemic, but women reported spending more money on skincare. So skincare is the dominant segment of this beauty industry with about 42 percent of the market share. Hair care is about 22 percent. Makeup is about 18 percent. So health and beauty e-commerce sales are projected to grow at 77 percent between 2021 and 2026. So I think it's a growing industry.

industry. It's a resilient industry. It's kind of changing the way it does marketing with e-commerce. But so you have companies like Alta. You have Sephora, who's a part of LvMH. You have Estee Lauder. But you also have companies like Procter and Gamble who owned Secret, Olai, Gillette, Old Spice, Unilever, owns Dove, Seventh Generation and Axe. So there are a lot of different ways to invest in the beauty market through a lot of different companies. In terms of the e-commerce piece, because this is an important piece for any retailer, how do beauty companies get over that challenge? Because I mean, I'm not buying makeup, but I imagine it's the sort of thing that you want to try it on in the store or see how it looks in a certain light, that sort of thing. And I don't know, is there just a trust barrier that consumers need to get over? Because we were talking earlier about TJX.

There's some impulse buying that goes on when you go there. It's hard for me to imagine impulse buying of beauty products online. So that's, I think, why skincare is so important in that factor, right? Because skincare isn't the same type of thing with, I don't know how that lipstick's going to look on me. Or I don't know if that shade is right for me. But it's going to say, I love this brand, so I'm going to get their face mask or something like that. So I think skincare is a really important component of that. But a huge thing is a third of beauty product buyers interact with brands on social media.

YouTube is a top source for beauty-related content. There are the watch time for makeup transformation videos on YouTube almost doubles each year. Kylie Cosmetics, Kylie's brand, Kylie Jenner's brand is the most followed beauty brand on Instagram with 25 million followers. And so I think with the rise of the influencer culture, with that type of marketing, people will become loyal to a brand. or loyal to an influencer who maybe has a similar skin shade to them and says, oh, well, it looks really good on them or their friends. Maybe it'll look good on me to kind of get over that barrier of trust as you end up trusting the person.

And I think a lot of beauty brands have been really strategically smart in investing in marketing within influencers. And I think that's going to continue to grow. And then also you have places like Sephora where you go and there are so many different brands you can try things on. And they give you gifts sometimes. they give you gifts on your birthday. They have all of these different things to kind of show you new brands

and get you excited about new things and continue to have those as splurcheses. I remember a few years ago on one of the podcasts, we were talking about ALTA, and I want to say it was Ron Gross, but one of the people was talking about their loyalty program. And whatever the number was, it was much larger. than I would have imagined. So when you talk about sort of that type of touchpoint for consumers, it seems like that's just a great strategy for those types of businesses. Yeah, and they have, Alta, Sephora, a lot of these places have so many different offerings. So you can go in and you can get your hair care and you can get your skincare and you can get

your makeup. And so they have all of those things in one place, whether that's online or in store. And I think that also increases loyalty because it becomes a one-stop shop. when something is a one-stop shop, I think you're more likely to just continue to go back instead of saying, I have to go to a different place for each of these needs. All right. Before I let you go, you know, this is, and it has been for months now, this has been a stock market where depending on your situation, depending on your experience level as an investor, how close you are to retirement, there are a lot of people out there who are looking at some stocks being hit and seeing opportunities there.

We got a great question at the Motley Fool Money hotline. Dan, can you play that voicemail we got? At the peak, I was up 75%. And I want to use it to add to my existing positions that are already up at this crazy time. Increase my position on stocks that are down, but I believe in their long-term potential. Or pick some of both, the ones I think will perform the strongest overtime. What things should I consider? Thank you, producer Dan Boyd, and thank you, Brian,

for a great question and whether he meant to or not. Brian asked a question that I've been asking myself for a while now, which is, I've got some cash. I'm looking at the stocks that I own. Some of them have been hit really hard. Some of them, either they're treading water or they're up. Where should I be adding? What do you think?

And obviously we can't give personal advice for, Brian, I shouldn't put it that way. Like, Brian is the only person we can't give personal advice to anyone. So I'm not singling you out, Brian. But how do you approach this question? Because I feel like he's asking a pretty universal question for investors who have a decent size portfolio in terms of the number of holdings. Yeah, it's a great question.

Kind of the million dollar question is what's my best strategic move? So my short option, my short answer would be option C that he gave kind of both, but here are some things that I would think about. So I would start by just thinking, how are you feeling right now? So you seem based on this to be handling this quite rationally really well. So I think that that shows that you're able to handle volatility well or you're currently at the right amount of volatility for you. So I always start with thinking about your risk tolerance and your risk, think about things from a risk standpoint. Then thinking about the individual companies, I would think, through what are their long-term prospects of these businesses? What do those prospects rely on?

For every thesis I have for a company, I like to write down the Achilles heel of that company. So what could go wrong for this company, for this company to go to zero? So think about their financials. Think about market sentiment. How likely are those things to happen? How likely are those things to change? And really think through that thesis. So then think through what's happened with each of these companies during their last earnings calls. What are they reporting? What are they forecasting? How long could that decline last for if it's a decline? decline? And then do they have a proven track record for withstanding downturns? Do they have enough cash to withstand a couple of earnings of downturns? Things like that. So I would go through this exercise

for your companies and then turn that into kind of a top tier list of your favorites and highest conviction and then see where that falls into performance. So I wouldn't start with performance and then decide for my allocation. I would start with what companies do I have the highest conviction and then say, okay, well, how have these performed of my list of my top 10 companies? Then look at that and then kind of try and allocate based on your concentration risk, how much you want to think through your diversification within your portfolio and diversification through sectors. So I would start kind of thinking company-wise, thinking through risk-wise, and then go back and decide if you're going to allocate to winners and losers based on the answers to those questions.

I hadn't even thought of that, but that's such a great idea to assess. essentially remove the stock price altogether and just look instead at things like cash. Because that's, I think, and by the way, I'm sure I consume more financial media than the average person. So just take it from me. There is so much more fear in the commentary going on. I'm not saying it's completely unwarranted. There are a lot of X factors in terms of inflation, in terms of events outside the

United States over which the Federal Reserve has no control. Like, can't control what is happening in Ukraine, can't control what is happening in China. But it really does seem like some of the people who are going on CNBC and Bloomberg are trying to outdo each other in terms of how much fear they want to project. But to your point, Maria, that is one of the lenses I look at in my own portfolio is sort of the cash reserve that a company has. And also just thinking in terms of the next couple years, hey, if the next couple of years are maybe not as bad as the last six months, but they don't dramatically improve, if

the market just sort of treads water or is slightly down, who's going to make it? That's just sort of a binary question that I'm putting all of my holdings through. In three years, are you going to be here? a company like Apple and Microsoft, yeah, you're going to be here in three years. A couple of the stocks I own, I don't know. That's why I'm not adding shares. Yeah, absolutely. And I think for me, I also like to think about their relationships with who their customers are and how mission critical they are. So if a company, if it's providing a service to another company and the company is slashing its budget, are they still going to pay

for this? Are they still going to pay for their cybersecurity offerings? Are they still going to pay for this type of advertising. How is that going to work? And where do you think those customers will be in the next three to five years as well? So where are they going to be in terms of can they withstand downturns? And also, if there is a downturn, will their customers leave them? Maria Gallagher, always great talking to you. Thanks so much for being here. Thank you so much for having me. If, like Brian, in Kansas City, you want to leave a message on the Motley Full Money hotline. Just call 703-254-14-5. That's 703-254-14-45. 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 ourselves stocks based solely on what you hear. Chris Hill, thanks for listening. We'll see you tomorrow.