Motley Fool Money - The Overlooked, Obscure, and... Undervalued?

Episode Date: October 31, 2024

If you want to find market-beating stocks, sometimes you have to go where few others are. (00:15) Jim Gillies and Ricky Mulvey discuss: - Why the market may be overreacting to Boot Barn’s CEO departure. - A niche-grocer that’s seen its stock 2x in the past year. - Finding “growth at a reasonable price.” Then, (16:44) Larry the Werewolf joins Ricky to take a look at Hershey and offer up his top three favorite candies for Halloween. Companies discussed: BOOT, SFM, AER, HSY Host: Ricky Mulvey Guests: Jim Gillies, Larry the Werewolf Producer: Mary Long Engineers: Rick Engdahl, Austin Morgan Learn more about your ad choices. Visit megaphone.fm/adchoices

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We've got a misunderstanding and an overreaction. No, we're not gaslighting you. You're listening to Motley Full Money. I'm Ricky Mulvey, joined today by award-winning podcaster Jim Gillis. Jim, how you doing? I'm not sure I'm award-winning. Well, I'm part of a very large collective, I guess. We're going to add this to everyone's email signatures.

Fantastic. But I wanted to talk to you today mainly because I hadn't talked to you in a while. And it is Big Tech earnings week. We had meta. we had Microsoft we could talk about. You're making me look at earnings from boot retailers and airplane leasing companies. Why, sir? Why?

Because I'm not the world's biggest tech guy. I don't know if you've noticed that. I will say I've got lots of exposure. I've got about 40% of my family's money in index funds. And of course, the Magnificent Seven have really been driving the main index. But my take on it is, look, I'm going to add, precisely nothing to the conversation about Microsoft or meta or pick, pick your large tech company, because there's so many eyes staring at those types of companies.

I'm going to, my incremental contribution is going to be negligible at best. But where I believe I can add value is in the small, the obscure, the unloved, the misunderstood, hence the tickers I threw at you today. Perhaps perhaps some Halloween theme, obscure, spooky, misunderstood. Let's go to the barn, Western Re, retailer called Boot Barn with more than 400 stores announced pretty solid quarter two earnings. Five percent same store sales growth. That's not bad for a retailer in this kind of sort of recession. However, we got a problem and that is that the horse has left the barn CEO, Jim Conroy, is leave.

Jim, don't shake, why are you shaking your head? That was a good one. That was one of my better ones. I got more. I was going to say. That's good. Okay. Continue. CEO Jim Conroy is leaving for the greener pastures of Ross stores, the discount retailer, C. to be better. Chief Digital Officer John Hayeson stepping in his place. Mr. Market says that this swap is worth about 750 million of Boot Barn's roughly $4 billion market cap. Let's start with assuming that the market is right, because usually the market can be wrong, but usually the market's right. What needs to be true about Mr. Conroy's leadership for this drop to be worth it? Well, I mean, that, you know, I'm going to see if I can on the fly come up with some horse and western puns like yourself.

It assumes that he is the show pony, right? That he is the reason for their success over the past decade. And I do not hold to that. I think that I'm going to give you what they just report. I'm going to give you more detail here, okay? For the quarter, they did 426 million in sales. Their guidance, which was raised, by the way, La, but their guidance was for $405 to $412 million. They did $40 million in operating profit. Guidance was for $33 to $36 million. Same store sales of almost 5%. The guidance was originally negative half a percent to maybe 1.4.4. So they pretty much tripled that. Earnings per share of 95 cents, guidance was for 81 to 87 cents, profit margin, operating

profit margin 9.4%. Guidance was from 8.2 to 8.7%. They bumped their full year guidance substantially, which is the second time in two quarters of their fiscal year, so 100% of the time so far, they bumped their guidance. This was a great quarter. And yet, since reporting that, the stock is down 22.5%. And you've identified the one reason why. I think the market is reacting this way.

And again, I think the market's wrong. But I will do another little reason. Wait a second. The market is reacting poorly and yet you say, nay. I can't top that, Ricky. I'm just, I'm going to let you out. I'm doing a boot retailer earnings. I got to work to get the listeners attention.

All right. Well, and I even tried to get you to do contour brands, which is jeans and Western, which would have done with the Western theme. Have you ever recorded with your? yourself, this is going to take 15 minutes. Exactly. At least. Okay. So the other reason why I think Boot Barn probably sold off a little bit is because in spite of all that excellence I've just talked about, cash flow took a bit of a step backwards. Cash flow is actually negative for the quarter. Now, this is entirely

attributable to a sharp uptick in inventory, which I think will reverse in coming quarters. And I think it should be expected, right? Because they've had two excellent quarters so far in this fiscal year. And they've just guided for, you know, they've really substantially raised their guidance. They sell boots. They need more inventory. They spent it in this quarter for future quarters. So I think that should have been seen entirely as predictable. But I understand why the market might have gone like, you know, not cash-well positive. The second one, of course, is if you talk about, is Jim Conroy. Yeah, Jim Conroy leaving. Put yourself in his shoes, though, okay? They reigned, they being Ross stores where he's going. They rain. They ran.

money on him. The comp package is going to be about 25 million in year one. It's going to be about 75 million, assuming Ross Store's stock price doesn't move. It's going to be about 75 million over the next five years. His pay last year at Boot Barn was very generous. It was about 7 million, but $5 million of that was restricted stock and performance-based stock units, which will surely be forfeited because he's walking at the door. He's going for a $4.5 billion company before the earnings his release came out to a company 10 times that size. He's in his mid-50s. I think this is the case that he wants a bigger challenge. He's been there for, I think, 12 years at Boot Barn. Are we going to begrudge him this big fat payday and a bigger challenge? Again, I'm going to quote you,

I say nay. I would like to think most companies I follow. And first off, how many people, show of hands, how many people could have named Boot Barn CEO before that news story? came out. I'm an owner. I've recommended the company. I'm not sure I could have, without a little bit of thinking, remembered his name. I like to think that most companies that have had the success that Boot Barn has had, quarter in, quarter out, year in, year out, I like to think there's a bit of a bench strength. And I like the fact that the gentleman who's responsible for a chief digital officer, I like that they are, that they're giving it to him, frankly. For now, for now. It's interim tag. I should put that.

We know very little about this cat. We'll see we'll see what happens. A couple comps I want to point out. So, Boot Barn, making more in same store sales than Dick Sporting Goods, which is a market favorite, and also tractor supply, which plays in a similar-ish, but kind of different space.

Tractor supply actually having negative same store sales growth. One of the themes we're going to hit with another company later is growth at a reasonable price, something you like to focus on. Does Boot Barn count? is growth at a reasonable price? It does.

And when I actually recommended the name in the first place, it was with a GARP growth at a reasonable price thesis. So they have 426 stores. I think they had somewhere in the 300 stores when I first wrecked them. And they've got a pretty good layout of what they're looking for in new stores. They think they can get to 900 to 1,000 stores in America by fiscal 2031. We're in fiscal 2025 right now. At that point, I think one of two things can happen.

One, they'll say, well, if we can do a thousand stores, we can do $1,300. But as well, you know, I mean, I think the concept works beyond the borders of your fine country. I mean, have you been to Alberta or Saskatchewan? Not yet. Well, you know, I don't recommend them in February. But there's one or two cowboys up there. Latin American cowboy culture is a thing. I think they can, I think there's a lot of legs here.

And if you look at the cash on cash returns for their stores, the payback periods on a cash on cash basis is like in the one to 1.4 years. So when you have that kind of return, okay, and that kind of very short payback period, it arguably makes sense to grow as fast as possible as long as you can retain those metrics. That's number one. Today, though, they're trading for about 17 times operating profit, 23 times PE, But they're going to continue probably through at least fiscal 31. We're talking about growing the top line, low teens, operating profit, mid-teens probably,

because you pick up operating leverage as you grow. At least you should, and they have. And I think one of two things can possibly happen. I've already talked about once we get past their 10-year expansion process. As I mentioned, they could decide to continue growing, which, and I think there are opportunities for that. or they could flip the chain to what I call cash cow mode, where these don't put any more stores. And all the cash has been going and investing in new stores suddenly starts falling to the free cash flow line. Home Depot has been a fantastic example of those over the years.

And at that point, I think this company does 350 to $400 million a year in free cash flow. And you're buying it today for $3.8 billion, including a full enterprise value. So, you know, I think we're going to get past the CEO defection. I can't blame Conroy for, you know, here's $75 million and you don't have to come to work every day. I mean, who among us wouldn't take that, right? So, again, I think this is an opportunity. And, well, I'll leave it at that. I'm going to make, I'm going to make one reference.

I don't think you'll get is a Canadian, but Cincinnati College football. It's a stepping stone where there are a lot of coaches that would go to Cincinnati for a few years. And then they move on to a bigger and better opportunity. The fans were always upset. said about it. Shout out Luke Fickle. Shout out Brian Kelly. Brian Kelly. Anyway, I'm going to make an audible here speaking of football. We're going to Sprouts Farmer's Market because this is another growth at a reasonable price question mark. Sprout's Farmers Market is a company you followed for a while. This is one where my lynchian senses have betrayed me because I went to one. It's not quite

Trader Joe's, not quite whole feuds in my view. I haven't been back. I'm wrong. A lot of people love it. And that's why their comp sales growth is up 8% placer AI measures the foot traffic. That's not just pricing. They say the foot traffic is matching up with that. Earnings per share for a grocery store, a grocery store, Jim, earnings per share up more than 40% from the prior year. Ecommerce sales up more than a third. Now that's 15% of the business for this niche grocery store.

Highlights from the quarter, why am I wrong about this company? You're not wrong about this company. I've recommended this company twice and Hidden Jim's Canada. I love this company. You're absolutely not wrong. This has been a, or at least you're not wrong in praising and bringing up the things that have done really well. Yeah, sales up 14%. Comp sales. Same store sales, 8.5% in this quarter.

As you mentioned, EPS up 40. New store openings were a little light, but that's because they had two stores in the pathway of Hurricane Milton, so we understand why they didn't open those. But they have just been crushing it for the better part of three years now. And like I said, we've got them on the scorecard twice at like $24, $25. $5 and I think 33. We have just been enjoying this one. And it was, again, like we talked about Boot Barn, this was a growth at a reasonable

price thesis. But with the added benefit at the time we recommended it, and I feel this is where we're going to segue through here, when we recommended it, it was the way I termed it was it was a best in class in their industry, best in class grocery store, trading with multiples. And best in class meaning in terms of margins, earnings growth, cash generation, what they were doing with that cash generation. It was a best in class operator trading with a worst in class valuation. And part of the success that this company has had is because it's no longer being treated as a worst in class operator. It's kind of best in class

operator now, which it should be. Yeah, maybe some of the analysts had a similar experience to me. And we've all been wrong about it. The stock's up more than 200% over the past year. We talked about Boot Barn. You made the case that it 10 times cash flow for the future. This seems like an opportunity here. Let's talk about Sprouts. Let's bring, let's bring this theme through to Sprouts. Is Sprouts still growth at a reasonable price with all of this boost in the valuation of Sprouts Farmer's market? It's still growth. I'm struggling with reasonable price. I will admit. I expect 10% store growth for the foreseeable future. There is lots of real estate for them to grow in the U.S. Plus, I think the concept will work beyond your borders. I don't see any worries on the growth side of things. The problem is,

as mentioned, when I wrecked this thing both times, valuation, I mean, I was struggling to, I'm like, look, stocks trading at 30 bucks. I think the, like, fair value is 45. And management were, they had more cash than debt. They were tremendously cash flow positive. Management were aggressively buying back their own shares. Share count is, in fact, down more than a third since 2015. They've also paid off all their debt. I don't count operating leases as debt because, you know, I don't like to capitalize operating expenses. And I admit there's a certain amount of anchoring here. I will, I will admit to that. But, you know, when I look and see what I recommended when it was trading at six and seven times I bidda is now trading for 21 times

Zibada. When I recommended it was trading at 13 or 16 times free cash flow. Now it's trading at 36 times free cash flow. It was trading at 11 to 14 times with a PE. Now it's trading at a 43 PE. These present multiples are as high, if not higher than Whole Foods back in the day. I'm not sure it's deserved. And I also run a discounted cash flow for this company. In the past, it was tremendously undervalued. Today, I'm struggling to get a fair value calculation above 7580 range kind of thing. And it's trading at, I think, about 130. So, look, DCFs are guaranteed to be wrong, but they are useful signposts. And I think, and again, I love this company. I own this company. I've obviously, I'm invested in it because I've recommended it twice. I love what it's

done for our members. But I think management might be agreeing with me. They're a little hot, because they have spent, as I mentioned, they were aggressively buying back their own stock. And usually spending any money they weren't spending on opening stores, they were buying back shares. This quarter, they did $156 million in free cash flow. They spent just $25 million on buybacks. Rest is just gathering dust on the balance sheet, which is nice. But, you know, I think it kind of indicates management here or kind of going like, yeah, we're a little pricey. And I can't disagree with them. Follow the money and see where it goes. Let's, I know I know you have a bunch of notes on air cap. I don't think we have time for it, but for members of Motleyful Services, where can they find your thoughts on

air cap? My thoughts on Air Cap can be found easily in Hidden Jams Canada. I will be discussing them in more detail, probably in next Friday's column, spoiler. I will simply say about Air Cap, this is a cheap business run by the best in the business. That would be CEO Angus Kelly, trading for one-time book value in about eight and a half times earnings, both of which are understated, based on what they do. They are aircraft Lassore that is in the sweet spot for their industry. And aside from the growth at reasonable price stories, we just talked about, I'll just leave you with this. I think air cap is undervalue today. And I don't know that I own enough of it. All right. Are you mad you didn't get big tech talk? We got that on Friday with Apple, Amazon, Microsoft,

meta, Jim Gillies. Thanks for being. here. Happy Halloween, man. Happy Halloween to you too. All right, every year I check in on the candy industry with Asit Sharma on Halloween. This year, though, he canceled on me at the last minute and sent someone else instead. Every year, Asit Sharma and I check in on some candy companies. This year, though, Osset is unavailable, and he has brought in his buddy Larry the werewolf. Larry, how you doing, man? I'm doing great. Thank you very much, Mr.

to Mulvey. This is indeed an honor. It's a privilege. And I'm so excited. So much so. I just have to do this, although your producer told me not to because it would blow out the levels in the mic. But here we go. Uh, where wolves of London. Oh, this is, I can, I can feel more people tuning in right now. Um, you know, Larry, wherewolves are known for a lot of, uh, things, usually around full moons. heard the how. Do you do, do you do stock analysis? Well, I do some stock analysis. I do securities analysis. I've been working on this for quite a while. I had this she-wolf girlfriend who said, Larry, you'd be better working on your own insecurities analysis. You'd make more money, but I got rid of her. I don't know if I'm sorry or if I'm happy to hear that. But I am ready,

speaking of being ready to move on to this discussion about Hershey because on Friday's show Dylan, J-Mo and Ron talked about the supply side, the Cocoa shortage. I'm hoping we can get more to the demand side. And I don't know, is Osset your roommate, just your friend? How does that work? Because how does that work? He's a friend and you know how this whole werewolf thing works. We don't get around much. You know, we sort of transform. And usually people keep us undercover, But I met Asset years ago at the very end of a day on Halloween in a grocery store. I didn't scare anyone because everyone thought I was in costume.

We struck up this conversation by the Mars candy bars. And he was just such a great guy. And he got me interested in investing. And, you know, since then, it's just been this great, fun relationship. I've learned a lot. And I'm just so eager to spread my own investing knowledge here as we talk on, Mr. Maltese. The last time I spoke with Asset around Halloween, we talked about Hershey. and it was at that point, it was a top dog

and its biggest questions almost were about its move into snacking. Now it's got the cocoa questions. It's also got more, I would say, weight loss drugs questions, people becoming more concerned about those ultra-processed foods of which Hershey makes a lot.

Since it's moved into snacking over the past year, have we gotten the diversification that was promised? What's the state of Hershey right now in 2024? Yeah, well, this is a little surprising, Mr. Maldi. I mean, Hershey's management talk this big game about diverse buying into snacks. They have this North American confectionery

unit now and the North America salty snacks unit, which is, of course, from buying those snack brands like Amplify. But if you look at the numbers, they've lost some share in both confectionery and in salty snacks. So what does this tell us? Probably that they didn't know a lot about snacks when they bought these businesses or they knew a lot about snacks but have yet to bring the innovation to the fore the new SKUs that customers want to grab off the shelves. The question I'm most excited to ask you, this is when I've been looking forward to to get an answer from you, Larry. What are your top three favorite Halloween candies? Well, I have made a list. I have written it down, Mr. Moldy.

The first that I want to talk about, I'm going to let you in on a little secret here. I'm not really looking for a secret. I'm looking for like this is a fun way to end the segment. Just like quickly, what are your top three favorite Halloween candies? Fine then. The first is dog treats. That's not a candy. It's so delicious. In fact, the greeny. brand peanut butter flavored pill pockets which you can get off chewy in a value pack are delicious that's okay is there anything we can swap that in with because that's you know that's that's a

dog treat that's not that's not like a you know we're thinking we just talked about chocolate there's some easy options in there you could look for gummies nerds gummy clusters that's a big one that's hot in the streets another chance to try again sure how about frozen blood pops so as you know, two main classes of scary types around Halloween, vampires and werewolves. I have many vampire friends. We become polarized. I like to reach across the aisle. Keep a cooler frozen blood pops for little vampire children in the neighborhood.

Because look, at the end of the day, we have something in common. We all want to scare the hell out of humans. So frozen blood pops. Okay, there's things with sugar, coke. I'm trying to get your mind working here. sugar, cocoa, maybe like a lollipop, some sort of taffy. You can really go to a lot of places with this. So what you got? So I got for my number three and most favorite treat of all is Paul's mentholuptus triple action lozenges. Because werewolves have terrible breath and you get a two for one,

Mr. Malby. You can sweeten your breath and you can soon. that throat that is so sore from howling all the time. So close. You got to something that I think has sugar in it, but we're not there yet. What is just literally, dude, I'm sorry, not dude, werewolf, just one Halloween candy

that you like to eat. Silken tofu, Mr. Moldy. I cut it up into little squares and put toothpicks in them. I put them out on the porch for the kids. That's savory. We were in sweet and you went savory. It's all great.

It could put a little bit of, a terriaki sauce on them. If you like the sweet sort of the equation, you can do that. Okay, I'm looking like dark chocolate Reese's cups, nerds gummy clusters, Tony's dark milk chocolate pretzel toffee. I'm giving you the answers. Do you just literally pick one? Nah.

All right. Larry the Werewolf, appreciate you breaking down the stock. Maybe one of these years you or anyone in your household will give me a favorite Halloween treat. As always, people on the program may have interests in the stocks that 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. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.