Tip:
Highlight text to annotate it
X
Sean O’Reilly: Punxsutawney Phil predicts an early spring for 2016. Can he be trusted?
All that and more on this Consumer Goods edition of Industry Focus.
Greetings, Fools! Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is
Tuesday, February 2nd, 2016. Joining me to chat burrito bowls, designer bags, and groundhogs
is the irreplaceable Vincent Shen. What's up, man?
Vincent Shen: How are you, Sean? O’Reilly: Not too bad. Punxsutawney Phil,
he saw his shadow or didn't see a shadow? How's it work?
Shen: He did not see his shadow. Was not scared off.
O’Reilly: Did not see his shadow? Okay. Shen: They came out indicating what should
be an early spring, which would be nice considering the two feet of snow we got last week.
O’Reilly: Yeah. Has anybody ever done a statistical analysis of how accurate these
rodents are? Shen: I actually wish I had look it up now
because I'm sure somebody has done it and ...
O’Reilly: Tune in next week when we actually tell you if this guy should be trusted. Actually,
we're really going to be talking about two big consumer goods stories of the day. First
up is Chipotle. Obviously have been beaten up a little bit, but are they finally moving
past this whole cilantro poisoning thing? Shen: Cilantro poisoning. The reason why we
talk about it is few reasons. First of all, CDC officially has said that they believe
-- they announced this on Monday -- that they believe the E. coli outbreaks at Chipotle
appear to be over. O’Reilly: I can breathe a sigh of relief.
Shen: The stock bounced up a little bit. I think it was up a little over 4% yesterday
as a result of that announcement. Pretty fitting because they're actually reporting their earnings
after the close today. They also have another big event coming which is next Monday. They
have that company-wide meeting, which you have mentioned previously on another episode.
O’Reilly: Yeah, for listeners that don't know what he's are talking about, they're
actually closing all the stores and having this meeting about safety and food prep and
just talking about this thing, right? Shen: Yeah, exactly. They are closing all
the stores for the lunch service. They are reopening at 3:00pm. During that intermission,
call it, they're going to be broadcasting the meeting out of Denver to hundreds of locations.
O’Reilly: The symbolism of this alone is awesome.
Shen: Yeah. O’Reilly: I like it a lot.
Shen: Let's take this one at a time. First of all, the CDC announcement, they basically
said that their investigation, excuse me, indicated that some Chipotle ingredient or
meal was probably the source of the contamination but they couldn't actually identify the specific
ingredient or whatever that caused it. The stock bounced up 4%. It closed at $473 on
the positive development. Keep in mind they've been dealing with these food safety issues
since last August. They had salmonella cases in Minnesota in August 2015 with about 60
people affected. Then they had all those E. coli cases which I think were the brunt of
the PR hit where that was in the Pacific Northwest, spread to other states, again about 60 people
and then I think it was in December where they had the Norovirus cases in California
and Boston that effected hundreds of people. O’Reilly: This has been a cascade of bad
news. Shen: Exactly. It's really interesting when
you look at some of the 8K’s they filed as updates on these situations how the news
of the Norovirus cases for example in December really hit their comps week by week. You can
see how it swaying. Things look like they're setting and then they completely just plummet
as a result of the headlines. O’Reilly: The CDC announcement couldn't
come at a better time because they're about to report earnings that are probably going
to be bad. Shen: Yeah, exactly.
O’Reilly: They can just point and be like, "Listen, it's over."
Shen: I think everyone will acknowledge the fact that they've had these challenges, that
they're dealing with the best they can. Going forward, they're obviously looking to a brighter
future. That's for sure. O’Reilly: What kind of results can we probably
expect with these likely abysmal same-store sales results for the fourth quarter and last
year? Shen: Sure, sure. Just for a quick recap.
The company initially expected to be hit for their comp restaurant sales down 8 to 11%
for the 4th quarter. O’Reilly: That's how they used to grow every
quarter. Shen: Exactly. They thought that restaurant
level operating margins would be about 22 to 24%. Earnings per share between about $245
and $285. Then, the company issued an update early last month that kind of basically said,
"Things are worse then we thought." 4th quarter, comp restaurant sales those are actually down
15%, operating margins were down to 20 to 21%, earnings per share of just $170 to $190.
On all three of those metrics, they pretty much downgraded significantly.
O’Reilly: Yeah. Shen: Just to give you a little bit of context,
for the year ago quarter restaurant level operating margin was 26.6%, earnings per share
was $384, and comp restaurant sales were up 16% over year-over-year. That's like a 30%
swing. Now for the month of December, specifically,
I think with some of the additional news, how everything cascaded together, they saw
their comp restaurant sales down 30%. O’Reilly: Wow.
Shen: Specifically for that month. That's what people are expecting for the 4th quarter
full year obviously ... O’Reilly: Makes for shorter lines doesn't
it? Shen: Yes. Exactly. That is obviously is going
to have a really negative impact on their full year as well. We've talked about next
Monday that meeting. To be specific, the company mentioned is a press release that the point
of the meeting is one to thank everyone who is part of the organization who has worked
really hard in the past couple of months to institute new stricter safety standards, make
sure things are operating well, that there's no more of these cases breaking out. Second,
to announce some of their new initiatives which they hope will guarantee that there
won't be another outbreak like this in the future.
O’Reilly: Right. Did they mention anything along the lines of the ... Is it going to
make them less profitable to have all these new safety standards? That is my question.
Have you caught anything like that? Shen: The thing is, the meeting is next week.
I'd be curious to hear about details with that in the earnings call today and also in
the meeting. I'm sure, I know for a fact that they've reported increased costs as a result
of these incidents. It was like $16, 18-million dollars, I think.
O’Reilly: We just don't know what they are. Shen: Specifically, where they're going to,
how it's going to impact some of the margins, we'll be yet to see that.
O’Reilly: Cool. Okay. Very cool. Shen: Another thing you mentioned that you
brought up is their 2016 forecast. Basically, they've acknowledge that any previous forecast
that we provided for this year-- O’Reilly: Throw them out the window.
Shen: Throw them out the window entirely because they're no way we can know based on this climate.
From Wall Street at least, analysts are expecting revenue earnings to decline 15 to 20% each.
I think for this company, long-term, they are really going to need to execute well on
these food safety plans because even the slightest hiccup is going to crush them. It's going
to crush them. O’Reilly: It's going to be bad.
Shen: Otherwise, you know, in my personal view I'm pretty confident that they'll recover
this as time passes assuming there aren't any headline worthy incidents. The thing is,
other restaurants have run into issues like this, even worse ones, and they've managed
to recover let alone Chipotle being arguably the leader in the whole fast casual movement.
I think they're in a strong position. O’Reilly: It definitely seems like Chipotle's
got the heart and soul of what you want in an organization doing this sort of thing.
Shen: Yeah, their leadership has embraced everything. They've been very, very forthcoming
with information. Working as much as they can with the various regulatory agencies that
have been involved looking into this. I think that they're in a good place and people should
be looking to the future a bit now. O’Reilly: Cool. Before I move on, I want
to point out listeners to a newly redesigned focus.fool.com. There you will discover a
special offer to join the Motley Fool Stock Advisor newsletter to start your new year
off Foolishly. All loyal IF listeners have access to a special iscount on Stock Advisor
that works out to $129 for a full two-year subscription. Just go to focus.fool.com to
take advantage of this offer. Once again, that's focus.fool.com. Moving on from Chipotle
to Michael Kors. This is a nice little follow-up to our Coach show where we talked about Coach's
great results. They had their first growth-based quarter in like eight, ten quarters.
Shen: Yeah, something close to that. O’Reilly: Michael Kors, too, has been getting
beat up. Nobody wants designer handbags I guess. They just reported and it was pretty
good. Shen: There are some very clear similarities
here between the areas where Coach saw success, that we talked about, and where Michael Kors
has seen success with them releasing their results before the open today. First of all,
this is for their fiscal 2016 3rd quarter. Their revenue was up about 6.3% to $1.4 billion.
Up almost 10% in constant currency. They have their international segment and obviously,
like many companies, it's been hit by unfavorable currency exchange. Their retail net sales
were up 11.1% year-over-year. They had double-digit growth in e-commerce, really big. Also, a
lot of new store openings. While their comps were down about 0.9% in constant currency,
retail net sales were actually up almost 16% and comps were up actually 2% when you exclude
the currency effects. Keep in mind with that really positive revenue growth that the company
has increased its retail store count by about 20% in the past year.
O’Reilly: Where was all that, because that's a big number?
Shen: They had … There's about a hundred locations, about a hundred locations being
kept at 20% and I think it was ... They have different locations with their outlets and
then their retail stores and they also have licensing store in a store with department
stores. In terms of geographic segments, I think it was mostly in the U.S. Obviously,
they're focused on their international expansion which we'll get to. I'm not ...
O’Reilly: Cool. That's fine. How are they doing with operating margins?
Shen: Sure. Their other parts of business, their wholesale net sales and their licensing
revenue were also up for the quarter. Their operating margin shrunk about 2.5 percentage
points. O’Reilly: Is that because they kept opening
more outlet stores and stuff? Shen: I think that's a lot of it. I think
it has to do with also a bit of an investment in terms of what they're putting into their
e-commerce initiatives for example. Earnings per share $159, up 7% year-over-year even
though there was a negative currency impact about 6 cents per share. They're showing some
really positive ... This by the way I should note, all of this really surprised at least
with the analyst estimates were beat them pretty handily. Their stock was up 22% before
we came down. O’Reilly: Wow.
Shen: Another thing I wanted to mention too from their report was they've been pretty
active with their share repurchases for the past few quarters so for this one, the repurchase
is about 4.7 million shares. Previously 9.4 and the other quarters, the three quarters
before that ... O’Reilly: This is turning out to be a really
good move. Shen: Exactly. In all, in the past four quarters
the company's repurchased about 20 million shares. They reduced their shares outstanding
by about 10%. During this tougher climate for them, they've been focused on making sure
that they're kind of maximizing where possible those returns to their shareholders. Very
positive. Specifically, for their business, some of
their offerings. Their shoes and accessories did really well. Their e-commerce, like I
mentioned, double-digit growth. Their international markets, especially with Asia, again doing
very well. That's actually very similar to what Coach reported. They had that acquisition.
Their shoes were doing really well. Some of their other accessories did very well. Their
e-commerce efforts in Asia markets were big for them so it mirrors very closely. You can
see that. It's really interesting during the earnings
call, CEO John Idol, brought up a really cool point where from where their e-commerce efforts,
they noticed how in mobile and online their offerings have expanded but customers were
flocking a lot of footwear. Having data like that has made them realize that that's become
a really popular category for us and now they're thinking about how that can apply to their
actual physical retail stores as well and hopefully benefit some of that data they get
from those online efforts. O’Reilly: Cool.
Shen: In terms of near term catalysts, they have their major spring collection planned.
Big picture we see that despite overall lower retail foot traffic during the holiday season,
I think retail metrics had it down about 6% or over 6%. Not all companies have been losers.
Macy's and some of those other companies have been struggling but we know that JC Penney,
for example, Coach, Michael Kors they're kind of taking share away and obviously it's not
like across the entire sector everybody has been struggling with some of these issues
in terms of the unseasonably warm weather or the currency fluctuations hurting tourist
spending for example. Even though the stock's up 22% for the day, it's still trading at
just 11x trailing twelve month's earnings. O’Reilly: The market's twenty.
Shen: I should add that Coach, coincidentally, is up about 23% since it reported January
26th. Again, really similar. O’Reilly: Right.
Shen: If management can really continue to execute with these popular offerings. They
have an attractive e-commerce online shopping model as well. Their footprint expansion,
they opened up ... They increased 20% in store count. That's going to continue hopefully.
They're seriously worth consideration in terms of a nice value play.
O’Reilly: Cool. All right. Thanks for your thoughts, Vince.
Shen: Thanks, Sean. O’Reilly: Have a good one. If you're a loyal
listener and have questions or comments, we'd love to hear from you. Just email us at industryfocus@fool.com.
Again, that is industryfocus@fool.com. As always, people on this program may have interest
in the stocks they talk about and the Motley Fool may have formal recommendations for or
against those stocks so don't buy or sell anything based solely on what you hear on
this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening and Fool on!