In this podcast, analyst Asit Sharma from Motley Fool and host Ricky Mulvey talk about:
- Walmart Expanding globally and the ability to set prices.
- Insights from general retail sales data regarding the state of the economy.
- The financial consequences of using weight loss medications.
Following that, analyst Buck Hartzell from Motley Fool joins Ricky for a discussion. Shift4 , a payment company showing remarkable growth figures.
To access complete episodes of all The Motley Fool’s complimentary podcasts, please visit our website. podcast center To begin investing, take a look at our resources. Introduction to investing in the stock market for beginners A complete written record is provided after the video.
The video was captured on August 15, 2024.
Ricky Mulvey: Walmart is optimistic about the economy, and you are tuning in to Motley Fool Money. This is Ricky Mulvey, and I am joined today by Asit Sharma. Asit, how are you feeling?
Asit Sharma: Ricky, we are doing great. I was unsure whether to place the “are” at the end of “we” or leave it as it is. We are doing well, and I believe we are doing well.
Ricky Mulvey: We are thriving. Exclude the preposition. This is a serious moment. Despite some people cutting back on expenses for travel and home renovations, let’s acknowledge Home Depot , Walmart The company continues to succeed in the competitive market and they shared some updates this morning. Here are some key points for you to choose from. Firstly, they have increased their guidance, which has pleased Wall Street as it is now close to 5% for the year, up from the previous 4%. This growth is impressive for a big retailer like them. International sales have seen an 8% increase, which is twice as much as the sales growth in the US. Additionally, there has been a turnaround in the sales of general merchandise like appliances and clothing at Walmart after a decline over the past three years. Did any specific details in the report catch your attention?
Asit Sharma: I find the international sales to be intriguing as they are structured differently compared to the sales in the United States. Walmart has been expanding its investments worldwide, exploring various formats beyond those seen in the US market. During the discussion, CEO Douglas McMillon highlighted initiatives such as the Flipkart operation in India, which offers a unique approach. Amazon.com Walmart operates a significant e-commerce business in India under the name PhonePe, focusing on mobile-based payments. In China, there is a similar concept to the US Sam’s Club, with a notable difference being that half of the sales are conducted digitally due to the country’s reliance on mobile apps. These international investments are proving to be profitable with higher margins compared to Walmart’s conventional operations, which is an interesting development.
Ricky Mulvey: This might contradict my previous belief, but there is also a noticeable trend of wealthier customers opting for Walmart. Perhaps, Asit, this could indicate that inflation is significantly impacting people, if not leading to a recession. Another point worth mentioning from the discussion is that the growth in pickup orders is outpacing in-store or club sales. It’s interesting to note that even in 2024, the trend of choosing grocery pickup over in-store shopping continues. Were you also surprised by this, Asit?
Asit Sharma: I wasn’t taken aback by the call either. It’s Doug McMillon, the CEO, once again. Our customers and members worldwide are consistently seeking four key things: value, a wide range of products and services, a convenient and pleasant shopping experience, and a trustworthy company to do business with. Particularly, customers are looking for a convenient and enjoyable shopping experience when purchasing goods. This aligns well with the current trends of delivery and pickup services. Given Walmart’s large store spaces, navigating through them can be time-consuming. Utilizing the convenience of pickup or delivery services is becoming increasingly popular in today’s world. I believe this trend will continue to grow even after the pandemic.
Ricky Mulvey: Understandable. I often ponder the diversity of products in the Walmart produce section and am amazed by the number of customers who still choose to shop there despite the inconsistent quality.
Asit Sharma: If you seek convenience, you must be prepared to take risks when you spend your money.
Ricky Mulvey: Here is an additional section. Walmart. Costco Large corporations, which have consistently achieved better results. S&P 500 In the last year, the S&P has generated a 24% return. Walmart has seen approximately a 40% increase, while Costco has achieved nearly a 60% growth. Kroger Being a shareholder in those grocery stores that are underperforming by just 11%, what does this trend indicate to you? Some of these stores are outperforming the S&P, but what do you make of this situation? Does it convey any message to you?
Asit Sharma: In my opinion, this demonstrates the importance of size. I often discuss this concept, but consider the returns you are highlighting. If you were to take a dollar bill and divide it into pennies, it would be impossible to physically achieve that. Let’s begin with 100 pennies. Here’s a question for you, Ricky. Can you guess how many pennies Walmart and Costco collectively earn for every 100 pennies they make in profit?
Ricky Mulvey: Two.
Asit Sharma: You are almost there, around 2.8.
Ricky Mulvey: That’s great.
Asit Sharma: I didn’t search for that information, by the way. I must say, you are performing exceptionally well today. It’s quite impressive, even better than I expected when I initially researched this. The key difference lies in the fact that if you enhance your sales by 3%, 4%, or 5%, you have the opportunity to focus on improving your operating margin. With significant sales figures in the hundreds of billions, you can achieve success. Walmart managed to boost its profits by around 500 million this quarter compared to the previous one, despite experiencing only a slight increase in revenue. This is something that investors value. When you have a substantial customer base, the outcomes can be remarkable, especially if your company is one of the top sellers globally. Currently, Walmart remains the top-selling company on earth.
Ricky Mulvey: One factor contributing to this is what you refer to as pricing power. However, CEO Doug McMillon highlighted that it is moving in the opposite direction. Earlier, you mentioned him as Douglas. Today, you seem to be very focused on being formal.
Asit Sharma: You mentioned that we should be formal, so you separated my contraction. I thought to myself that I should be very precise.
Ricky Mulvey: CEO Doug McMillon stated that during the quarter, both Walmart US and Sam’s Club US experienced a slight overall decrease in prices. It is unusual for CEOs to boast about reducing prices, but in this instance, do you believe that deflation could benefit the company known for setting prices?
Asit Sharma: Initially, the concept may seem dull and gloomy to the average person. The prices were reduced, but it was not due to a lack of consumer demand. Instead, the company managed to lower prices by improving cost efficiency in order to attract more customers. This strategy can be likened to a rubber band analogy, where during times of prolonged inflation, pricing power expands. However, successful retailers know when to adjust prices back to a balanced level to maintain customer loyalty. Unless there is a notable shift in commodity prices, it is unlikely that prices will decrease further.
Ricky Mulvey: Today we will be discussing the retail sector in its entirety, as we have received retail sales data showing a 1% increase compared to the previous month. This growth can largely be attributed to a significant rise in auto sales, as many dealerships were unable to sell cars in June. CrowdStrike There was a disruption in services, but we also have data that provides an overview of the first seven months of the year. I am particularly interested in this period because there are some notable trends. For instance, spending at restaurants has increased by 5% compared to the previous year. Non-store retailers, such as electronic stores, have seen a nearly 9% rise in sales. On the other hand, home furnishing stores, which can be compared to stores like Home Depot, have experienced a 6% decrease in spending. To summarize, while restaurant and electronics sales are on the rise, furniture sales are declining. Do you notice any similarities between your spending habits and these trends, or perhaps within the companies you are invested in?
Asit Sharma: Yes, I can relate to this. With the restaurant expenses increasing by 5%, I believe I am dining out more frequently each year. I enjoy eating out and I am curious if the tipping amount is included in these figures. It appears that we are now more inclined to tip at places where we did not tip before, such as local bakeries. The pandemic has taught us to support local businesses, which has become a natural response for me now. Although this may annoy some people, I feel compelled to support local establishments. Some establishments now present the tipping option more prominently, making it seem like the focus is on the transaction rather than the service. However, when it comes to local businesses, I believe in showing support without hesitation. Moving on, let’s shift focus to another point. While Furniture Home and Furnishing sales have dropped by 6%, non-store retailers have seen an increase of nearly 9%. This shift may be attributed to the convenience factor, but it is worth noting that some companies operate in both sectors.
Take Williams Sonoma is a retailer that sells high-quality kitchenware, cookware, and home goods. For instance, I own a company called, let’s say, “X.” It specializes in home furnishings and operates as a non-store retailer with a significant online presence. The company has been successful by strategically purchasing lists of furnishings and establishing a strong brand presence across various labels. Despite market fluctuations, “X” has excelled in recent years due to its exceptional execution. This highlights the notion that a business can thrive by going against conventional wisdom and trends, as long as it prioritizes delivering high-quality products and excels in all operational areas while remaining customer-focused.
Ricky Mulvey: Williams Sonoma is known for being a high-end retailer, attracting customers who may not be as affected by inflation compared to those shopping at more budget-friendly home furnishing stores. An intriguing article in Bloomberg Business Week discusses the impact of Ozempic in Bowling Green, Kentucky, where 4% of the population is on weight loss medication, in contrast to coastal cities like Brooklyn, New York, where the percentage is around 1%. This topic has piqued my curiosity for various reasons. Eli Lilly As a shareholder, I am currently contemplating the potential impact of weight loss drugs on society. While I believe these drugs could have significant effects that we may not fully understand yet, I am also cautious due to the high level of investor excitement surrounding them. The article mentions some economic side effects, such as crowded med spa parking lots where people obtain GLP-1 medications. Local gyms are uncertain if the drug Ozempic is attracting more customers, and restaurants are experiencing increased business. This trend, which essentially serves as excellent marketing for these companies, involves people noticing significant weight loss in others and inquiring about their methods. I am curious about the economic implications of this trend and would like to hear your thoughts on the matter.
Asit Sharma: What are the potential impacts on other businesses? Currently, there is a lot of competition, causing businesses to compete against each other. Despite a slight decrease in orders, restaurants in the area have not seen a significant drop in customers as people still value the social aspect of dining out. Consumer goods companies, such as grocery stores like Kroger, are having to adjust to the changing market conditions. Larger retailers like Walmart are facing challenges like decreased sales due to factors like the introduction of GLP-1 drugs. However, these retailers are adapting by promoting the sales of these drugs in their pharmacies. The dynamic between different industries, such as consumer goods and pharmaceuticals, is interesting to observe. The consumer goods industry, known for providing packaged snacks and beverages, is finding ways to maintain sales despite changing consumer habits. The article highlights the strategic placement of products like Mountain Dew in Kroger pharmacies, indicating the industry’s efforts to continue selling products even as consumer appetites are decreasing. Despite these shifts, the consumer goods industry has not experienced a significant negative impact so far. The competition and strategies at play between industries are intriguing to analyze in this context.
Ricky Mulvey: Sure, I would like to discuss the excitement surrounding the topic, particularly focusing on the benefits for weight loss and the discovery of additional potential applications. It’s important to be cautious in how we discuss this. Research indicates that GLP-1 medications could have positive effects on conditions like Alzheimer’s disease and certain addictive behaviors such as smoking and alcohol consumption. While they may not completely eliminate these behaviors, they could potentially help individuals moderate their intake, for example, stopping after consuming just one beer. Goldman Sachs GLP-1s are predicted to reach a market value of $130 billion per year. Putting that aside, Eli Lilly’s market capitalization has significantly increased from around 250 billion to nearly 900 billion in recent years, which is a substantial jump. It seems like a large portion of this growth and more has already been factored into the stock price due to the high level of enthusiasm surrounding it.
Asit Sharma: It can be challenging to predict the outcome in such situations. In my opinion, for new investors witnessing a major trend with a surge in capital, tangible results, and increasing hype for the first time, it is advisable to exercise caution. It is prudent not to invest too heavily in a single investment option, such as a specific pharmaceutical company. Diversifying investments across different options seems like a good strategy. Given the regulated nature of the industry, the long-term impact of these drugs remains uncertain. While current indications are positive for weight loss and other medical conditions, unexpected risks may emerge in the future. Keeping a close eye on developments is essential. For those keenly interested, there are thematic ETFs available, though they may lack liquidity and focus mainly on a few key players like Eli Lilly. As an investor, conducting thorough research and building a portfolio of diverse companies could be a wise approach.
Asit Sharma: Ricky, I’m unable to determine the exact amount of inflation at this time due to ongoing research and development for this concept. The commercialization process will also take several years. Let’s plan to revisit this discussion periodically and share our observations and thoughts.
Ricky Mulvey: Team Buyers pointed out that when it comes to transformational changes, we tend to overestimate their impact in the short term and underestimate it in the long term. It’s a good note to conclude on. Thank you, Asit Sharma, for joining us and sharing your valuable insights.
Asit Sharma: Thank you so much, Ricky. The Swiss franc.
Ricky Mulvey: The Motley Fool Money team will be attending the Podcast Movement convention in Washington, DC next week. If you’re also going to be there, feel free to come and say hello. We are looking forward to having conversations with you. In our upcoming segment, Motley Fool analyst Buckhartzol will be joining me to talk about Shift4, a payment processor that operates in a competitive market. While we have discussed Toast, a restaurant payment processor, extensively on the show, Shift4, one of its main competitors, has not received as much attention. Buck will help us understand the differences between these two companies. Who is Shift4 targeting as their customer base with their payment processing solutions?
Buck Hartzell: There is some similarity between them and toast, particularly in the restaurant industry. Shift4 is a diverse company, with approximately one-third of its business coming from table service restaurants. In addition to restaurants, they have expanded into the hotel industry and are now venturing into the emerging vertical of stadiums and events, as well as specialty retail.
Ricky Mulvey: One challenge faced by retail investors when evaluating payment processing companies is understanding their unique value propositions compared to their competitors. For instance, if I own a restaurant or a hotel, what distinguishes Shift4 from Toast, Block, Ad, or other similar payment processing firms, and why should I choose one over the others?
Buck Hartzell: You mentioned that the restaurant industry is highly competitive and challenging, which is where Shift4 initially established itself. They have excelled in providing table service solutions that offer cost-effectiveness and convenience for customers. Their Sky tab point of sale system, which is cloud-based and allows for mobile ordering, has been particularly beneficial for restaurants and venues. This technology solution addresses various issues faced by restaurant owners and event managers, offering a cost-effective and efficient way to manage operations.
Ricky Mulvey: One aspect that investors have criticized Shift4 for, whether justified or not, is the company’s frequent acquisition of other businesses. I do not have a personal stance on this matter, so to clarify, how does this company typically utilize acquisitions?
Buck Hartzell: To put it differently, in my opinion, based on research findings, making successful acquisitions can be challenging for companies. However, Sheft4, founded by Jerk Isaacman in his parents’ basement at a young age, has shown exceptional skills in acquiring and integrating businesses. Unlike typical acquisitive companies, Sheft4 does not engage in bidding wars but rather sources acquisitions internally. They revamp the acquired companies’ business models, focusing on recurring revenue streams. Despite initial revenue declines, Sheft4 has demonstrated significant revenue growth post-acquisition, showcasing their ability to add substantial value. With a track record of limited shareholder dilution and a strategic approach to acquisitions, Sheft4 stands out as a successful serial acquirer in the payments industry.
Ricky Mulvey: It appears to be more of a customer acquisition approach rather than acquiring entire towns.
Buck Hartzell: Exactly.
Ricky Mulvey: You brought up the different industries the company is involved in. They originally focused on stadiums and hotels, but have now expanded into gaming, casinos, sports betting, and other areas. It’s noteworthy that CEO Jared Isaacman placed the first sports bet from space while flying over Las Vegas. They began with restaurants. Are there any of these sectors that stand out to you as an investor who is tracking this company?
Buck Hartzell: All of the opportunities are intriguing, but the one that stands out as particularly appealing for investors is the involvement with larger clients situated near stadiums and similar venues. When engaging with these clients, there tends to be a longer waiting period before any benefits can be realized, such as in the case of securing a deal with a major European soccer stadium at the end of the season. These large venue agreements typically operate on thinner profit margins compared to smaller businesses like local restaurants. Despite this, the high volume of transactions in these deals ensures that profits remain substantial. Initially, the focus is on providing concessions within the stadiums, but there has also been notable success in expanding into ticketing services, catering to a larger customer base. Overall, the progress made in the stadium sector is impressive, with a significant influx of new customers being particularly noteworthy.
Ricky Mulvey: The company has given a few indications in recent years that are worth noting. In the previous year, CEO Jared Isaacman informed investors about the company’s strategic review, hinting at a potential move to go private as being public can be distracting. Bloomberg recently reported that Isaacman mentioned the buyout offers undervalued the business but did not confirm that it is off the table. Additionally, Isaacman has been observed purchasing company stock in the open market. What implications do you think these signals have for retail investors of Shift4?
Buck Hartzell: Initially, the idea of a strategic review made me a bit anxious, to be honest. I remembered a similar situation with a company called Nuve that went private, leaving passive shareholders like myself to sell their shares at a lower price while insiders retained theirs, which was quite disappointing. The stock experienced some instability, then transitioned to private ownership, leading to the need for shareholders to sell their stakes, with the possibility of the company returning to the public market at a higher valuation later on. However, what was reassuring was what Isaacman expressed about Shift4. He made it clear that they were not planning to follow the same route. He emphasized that his interests were aligned with those of other shareholders, stating that if someone wanted to acquire the company, they would have to offer a substantial price. This stance resonated well with me as a shareholder. The positive aspect of this strategic review is that they are not hastily selling the company, nor are they pressuring us to accept a discounted offer while insiders hold on to their shares. The company also indicated that they would be open to a buyout at the right price, given their impressive growth trajectory. If they receive an offer that reflects their value, they are willing to consider it, and I am content with that approach.
Ricky Mulvey: Isaacman believes that the stock market is undervaluing his shares as he continues to purchase them.
Buck Hartzell: I would say that he has engaged in several forward contracts in the past where he received an upfront cash payment but retained his voting rights in the shares. He has also donated some of those shares to charitable organizations while keeping his voting rights intact. There are some limitations on this arrangement, but he still benefits from any increase in the stock value when he receives cash. He has demonstrated his confidence in the stock by engaging in such transactions. Additionally, he recently purchased stock on the open market at $67 per share, and its current price is $75. They also engage in stock buybacks, having repurchased shares both in the last quarter and since becoming a publicly traded company, at favorable rates.
Ricky Mulvey: CEO Jared Isaacman expressed dissatisfaction with the company’s valuation during the recent earnings call, suggesting that Shift4 should be valued higher if it was recognized primarily for its success in the hospitality and sports venue sectors. Despite the company’s long-standing presence in the market and strong financial performance, including revenue growth, increased free cash flow, and raised guidance, its stock price does not reflect the typical characteristics of a growth stock. What is causing investors to overlook Shift4’s growth potential?
Buck Hartzell: Isaacman seems to be involved in this. Although we haven’t discussed him in detail, he appears to be a fascinating individual. He frequently travels in airplanes, particularly jets, and has even ventured into space. Since the company went public and has now been publicly traded for 17 quarters, they have repurchased 6.5 million shares at an average price of $54. Currently, the stock is valued at $75. This buyback activity is not solely attributed to Isaacman, as the company itself has also repurchased shares. This is possible due to their consistent positive free cash flow and profitability, a contrast to many technology startups that do not prioritize cash flow as Shift4 does. Based on my investing experience, individuals like Isaacman, who are founders and visionaries, often possess unique qualities that set them apart from the norm.
He is seen as a controversial figure by some, but I believe there is a lot to learn from his journey. Starting a company at the age of 16 without relying on family resources is no small feat. Building it into a multi-billion dollar enterprise over decades, despite facing criticism and challenges, requires a unique individual – typically someone with an optimistic outlook. Experienced business owners can usually discern when the market signals that their growth strategy may not be sustainable. In the current economic climate, where interest rates are higher and access to capital is limited for some firms, it presents a favorable opportunity for companies like Shift4 to pursue acquisitions.
Ricky Mulvey: Morgan Housel would describe him as a person with a creative and unconventional way of thinking. He believes that you can’t have one aspect without the other. That’s a satisfactory conclusion for Buck. Thank you for sharing your time and perspective on this.
Buck Hartzell: You are welcome. I appreciate it greatly.
Ricky Mulvey: Listeners should be aware that individuals featured on the program may own the stocks they discuss, and the Motley Fool may provide official advice for or against them. It is advised not to make any trading decisions solely based on the information shared. I am Ricky Mulvey. Thank you for tuning in. Tune in again tomorrow.
