In this episode of Motley Fool Money, host Chris Hill and Motley Fool analysts Ron Gross, Jason Moser, and Andy Cross look at this week's biggest market news. The February jobs report numbers were astonishingly small, so small that there legitimately may have been a mistake. Shares of Eventbrite (NYSE:EB) were down huge after earnings, but long-term shareholders should stay confident in the big picture. Big Lots (NYSE:BIG) had its best pop in years, and, boy, did it need it. And, as always, the hosts share some stocks on their radar. Stay tuned for an interview with Q2 (NYSE:QTWO) CEO Matt Flake. Q2 provides technology solutions for banks, and it's grown around four times in the last five years. Flake talks about the changing industry, how politics plays into banks' decision making, where the name Q2 comes from, and more.
A full transcript follows the video.
This video was recorded on March 8, 2019.
Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Joining me in studio this week, senior analysts Jason Moser, Andy Cross, and Ron Gross. Good to see you as always, gentlemen! We've got the latest headlines from Wall Street. We will dip into the Fool mailbag. And, as always, we'll give you an inside look at the stocks on our radar.
We begin this week with the big macro. The jobs report for February surprised a lot of people with just 20,000 new jobs added to the U.S. economy. The worst month for job creation in a year and a half. Ron, the consensus expectation was for 180,000 new jobs. How'd we miss by that much?
Ron Gross: The headline is very curious, and by curious, I mean confusing. Twenty thousand, much weaker than expected, so much you have to wonder if, potentially, maybe it's not even correct. There could be seasonality in there. There could be weather. There could be the government shutdown. It seems like something is wrong. It doesn't jive with the ADP report we got earlier in the week, which showed construction sector adding 25,000 jobs. This report today shows the construction sector losing 31,000 jobs. That's a 56,000-job swing. Somebody's wrong there. There's a lot of things going on.
Don't forget, also, this number today, there's a margin of error plus or minus 100,000 jobs. That's a pretty big margin of error. I expect that we will see a pretty large revision once somebody figures out what's going on.
Things to focus on, I think, are the all-encompassing view. Unemployment rate went down significantly to 7.3%, and a nice wage increase.
Andy Cross: Yeah. I think the overall way to think about this is, you have to remember to take these in three-month- or even six-month-average estimates. Last year, we were up 223,000 per month when you look at three-month rolling periods. I think it's important to not just take one number into play here.
One interesting point that I did like was, the professional and business services were up 42,000 for the month. That's basically in line with the average over the last year or so. Those tend to be high-paying, well-regarded roles that the U.S. is going to be more responsible for growing over the next decade or so. That one continues to be pretty impressive to me.
Gross: I was going to say, you shouldn't expect to see a robust job growth forever. Once we get closer to full employment, and there's less folks to get jobs out there, you'll see that number come down. I wouldn't be surprised to see that number slowly come down over time. This is just so severe that it makes me think something is a little wonky.
Hill: Safe to assume that we all expect there to be revisions upward when we get the numbers a month from now, but I want to go back to the construction number, Ron. That was the thing that leaped out to me in the initial report. I hadn't seen the ADP numbers earlier in the week. That's one of those things where, not to get greedy here, but not only do I want to see revisions up in a month's time, I want to see that construction number up. If this number is correct and the ADP number is the one that's wrong, that has broader implications for the economy.
Gross: For sure. You would much rather see a robust construction industry, for sure. Now, the ADP report and this report are often at odds with each other. They don't always go in lockstep. It's just not typically as severe of a difference as this.
Hill: I like that they have a margin of error of 100,000 jobs. Wouldn't that be nice?
Gross: I'm going to start doing that.
Hill: Whatever your job is in life, if you had a margin of error that big...
This week, Facebook (NASDAQ:FB) CEO Mark Zuckerberg published a 3,000-word blog post outlining what he called a more privacy-focused future for the social network. This comes as Facebook is building out a new integrated messaging service that will allow users on Instagram, WhatsApp, and Facebook Messenger to communicate in private with each other. Jason Moser, I feel like we've seen this movie before.
Jason Moser: Sure. Call me a skeptic, I feel like this is just a strategy move hidden in a PR stunt, more or less. If you read the blog post, you get what I mean by "PR stunt." He equivocates, essentially, doesn't commit to anything.
We're facing a point in time here where Facebook has lost a lot of consumer trust, and for good reason. The privacy concerns abound. We're also facing a point where we're seeing the evolution of social media, where more and more people are finding the drawbacks of living your life out in public to be a bit greater than they initially anticipated. Facebook needs to come up with something new, and messaging is really it. That's not a surprise.
But, again, you go back to the actual blog post itself, there was nothing committal. He didn't commit to anything other than just things he'd like to see. I appreciate that he's getting out there and talking about privacy, it's certainly an issue. But this is something that could have a material impact on the business. If they go toward a messaging platform with end-to-end encryption, that very much limits their ability to advertise based on what they're doing today. The idea of bringing commerce and payments into their universe is a great one. That would drive revenue growth. The problem is, they've been working on that, essentially, ever since they went public. I don't know why people would bring that behavior into their universe now with companies out there like Amazon and PayPal and Square that have built such strong competitive advantages and networks in their own right.
So, yeah, if I'm an investor in Facebook, I don't know that I'm feeling a lot better about the situation. They've got a monumental task ahead.
Gross: Zuckerberg and the company have been under significant pressure over the last couple of years relating to privacy, whether it's from the Senate, the media, consumers. I think it was inevitable that we would see something to shore up or move to a more privately secure functionality. But Zuckerberg has $22 billion dollars of net income to protect here. This is not him changing the business model overnight, not unless he wants the stock to plummet and layoffs to follow. This will be a very measured move that will take quite some time. How it actually ends up shaking out, I don't even think we can envision quite yet.
Moser: There's a lot of stuff out there today comparing what they're thinking about doing with what WeChat in China is doing today, essentially being that one-stop shop. You can get everything done just in WeChat. I don't have any doubt that, in a perfect world, that's the strategy that Zuckerberg would pivot to. I think it's worth also remembering, though, this is China versus what we're doing here. They're very different cultures. Perhaps this is a testament to the forward thinking that was involved with what WeChat has built out. They went to that from the very beginning almost, versus what Facebook had built up to this point. It's going to be more difficult for them to pivot into that direction when you see what WeChat has already built from the ground up in that regard.
Hill: As you indicated, Jason, nowhere in that 3,000-word post did Zuckerberg lay out specific steps. There weren't specific promises in terms of "And here's what we're building as we try to create this more privacy-focused platform." You go back to last year, when he talked about how "Yes, we're going to come out with this functionality where people can clear their history" -- that really hasn't materialized yet.
Moser: Not at all. If you read that blog post, you see exactly what we're talking about. It's a lot of ifs and maybes and possiblys, but nothing concrete whatsoever.
Hill: Shares of Salesforce (NYSE:CRM) down 6% this week after guidance for the first quarter came in light. Andy, you look at the fourth-quarter results for Salesforce, they were pretty darn strong.
Cross: Really impressive for a $100 billion company. And that guidance was not that light. Just look at the quarter, it was $3.6 billion in revenues. That was up 26%. That was above guidance. Subscription and support revenue, up 26%. A non-GAAP EPS of $0.70, which was far higher than the estimates. Cash generated up 24% for the full year. They have a cash flow yield, if you just look at the cash flow versus revenues, of 26%. Salesforce continues to be the leader in the CRM, customer relationship management, space. They're growing their influence. They guided for a four-year growth rate of sales of north of 20%, which, again, for a $100 billion market cap company, it's exceptionally aggressive. Maybe some analysts think that might not be possible, but Marc Benioff, who is a cofounder, owns more than 4% of the company, almost $5 billion worth of stock, has his life built into Salesforce, I certainly wouldn't doubt him too much. His history of delivering is pretty exceptional for Salesforce customers and shareholders.
Hill: We were talking before we started taping, you go back a couple of years, Salesforce was in the conversation, all these reports that we saw, of possibly acquiring Twitter. When you look at this business and the way Benioff has built it out, do you look and think, "OK, these plans are great in terms of organic growth"? But do you want to see him go out and make some acquisitions, whether it's Twitter or something else?
Cross: I don't. They bought MuleSoft for $6.5 billion and they're continuing to integrate that into their platform. They just partnered with Google Analytics 360, so now their clients have access to Google Analytics more seamlessly. They continue to invest in things like AI. Their Einstein AI delivers more than six billion predictions every day. They're really building this platform for all kinds of global customers to have a 360-degree view to their entire customer life cycle, from sales to bringing them into the platform. That's really impressive as we think about the world being more and more integrated. Salesforce is a leader in that space.
Hill: Shares of Costco (NASDAQ:COST) up 5% on Friday after second-quarter profits came in higher than expected. Ron, you looked at the quarter. What's your headline?
Gross: I'd have to go with U.S. same-store sales excluding gas up 7.4%.
Hill: That's strong!
Gross: That's strong! It's a great quarter! Total revenue up 7%. Some weakness internationally, so we do have to address that. Less than 1% same-store sales increase internationally. Canada was actually down slightly. But the bulk of this business is U.S., so it all offsets to shake out to be same-store sales increased companywide 5.4%. Very, very strong. Largely the result of a 4.9% increase in traffic to stores and websites. Online sales rose 20%. Membership revenue up 7%. Margins were up, translates to a profit increase of 27%. Fantastic quarter for Costco.
Hill: Great numbers in the U.S., but as you said, international...I hesitate to use the phrase weak spot, but it seems obvious to me that Costco management really hasn't been able to make international work close to the same way it does here in the States.
Gross: That's correct! I'm glad to see that they've rolled that out in a very measured pace. If you plow into some region with huge capex, and it just doesn't work out, it could turn a great business into a weak business.
One final thing I want to say is, they did just raise wages for their hourly workers to $15 an hour. That certainly has implications to the cost structure. But in the end, I think it's a great move. Very shareholder-friendly.
Hill: Rough week for Eventbrite shareholders. The event ticket platform posted a loss for the fourth quarter, and revenue guidance for the first quarter was not what Wall Street wanted. Shares of Eventbrite down 25% on Friday. Jason, was it that bad? Because it seems pretty bad!
Moser: [laughs] Well, the question, I think, is, knowing what we know today, is this a bad business? Or, is this a business that is being repriced for good reasons? I think it's the latter. I think this is a good business, but you have to remember, this is a young company, just fresh to the public markets. Low float, stock price based on zero fundamentals because they're not making any money yet. So, to me, this was more a matter of when, not if. Frankly, I'm interested in the stock now with this pullback. When you look at the numbers, it was a good fourth quarter. Net revenue and paid tickets are up. Quarter one guidance was a little bit light. Now, there are good reasons for that. Before Eventbrite went public, they acquired Ticketfly, which was another big player in the ticketing space. They're integrating that acquisition. Ultimately, in the back half of the year, they're going to shut down Ticketfly completely and rely on Eventbrite Music. That'll present some near-term challenges.
But I like CEO Julia Hartz. She's focused on the forest, not the trees. A lot of great language in the call and presentations. They're focusing on years, not quarters. She's our kind of CEO. Another interesting little side note there, because this is a global business, it was nice to see that they added Mercado Pago as a payment provider for their Latin American business.
All in all, to me, it's a business I like. I do own some shares. I'm looking at this pullback with some greed because I think there's a great market opportunity here for a business that is run very much in line with the things that we look for here.
Hill: There are a lot of different industries that we talk about where we say, "Look, there's going to be more than one winner in this space." There'll be more than one winner when it comes to event ticketing. But it seems like there's not going to be a ton of winners. How do you feel about Eventbrite...when it comes to buying tickets to an event, there are a lot of different platforms out there. It really seems like, in five or 10 years from now, there's going to be fewer dominant players than we have right now.
Moser: I think you're right. I think that's why we saw some of the consolidation there with the Ticketfly acquisition, for example. Where Eventbrite focuses primarily is that smaller-to-mid-market event management. They're not focused on these big concerts and events. They're trying to help the smaller bands and events and whatnot gain some traction and have some low-cost ways to promote their events. They do focus on a particular market opportunity, which I'm encouraged by. And it's a big market opportunity when you look at it from a global perspective. They continue to do the right things.
Hill: Okta's (NASDAQ:OKTA) loss in the fourth quarter was smaller than expected, but guidance for the first quarter was lower, and shares of Okta down 5% on Friday. Andy, you tell me, is this a speed bump? Shares of Okta are up about 80% over the past year.
Cross: I don't know if it's a speed bump. They're certainly investing a lot into the platform. That's worked exceptionally well. Just look at the quarter results for the fourth quarter. Revenue was up 50%. Subscription growth of 53%. They ended with 6,100 clients, that's up 40% for the year. They generated some free cash flow during the quarter, which was really nice to see.
When I think about the balance between growing their revenues and adding to the cost structure to be able to grow those revenues, there's maybe some concerns from the analyst community, trying to think about how that balance may work out. The guidance for the year was certainly slower growth than we've seen over the past couple of years, which had been north of 50%. Now they're looking more in the 40% range. But they'll continue to invest more and more in research and development, more and more in their sales cycle as they continue to try to grow the business. They now have more than 1,000 clients that generate more than $100,000 billion per year. That's about 70% of the total they have. The more they can add to the larger clients, the better it is for profits and for cash flow.
The Okta story continues to be in play. It's a business that, as we continue to expand and use more and more applications, all of us globally, we're going to need identity management systems to be able to integrate all those applications, and Okta's a leader in that space.
Hill: Obviously, a 5% drop, not as bad as a 25% drop, but to the point that Jason made about Eventbrite, do you look at Okta and think this is a stock that's a little pricey?
Cross: Well, it's a little less pricey now. They used to sell higher than 10 times revenues. Now they sell more like the eight-nine range. It's a healthy growth story, and maybe the pricing, at times, is ahead of itself. Certainly shareholders have to be ready for the volatility that any company selling at those levels will come with.
Hill: Discount retailer Big Lots has had a rough few years, but fourth-quarter profits came in much higher than expected and shares up more than 15% on Friday, Ron. Biggest one-day gain for Big Lots in five years.
Gross: And they needed it. Stock is still down 35% on the year, even accounting for this. They got crushed in December when they reported weak results. These results are better. They exceeded both company guidance as well as analyst estimates. Comp sales up 3.1%. Their remodeling efforts, their loyalty rewards program seems to be paying off. Profits were up 4%. Not knocking the cover off the ball, but it's still an increase. Nice to see. They're going to buy back $50 million worth of stock.
Listen, for those that are interested, this isn't a recommendation, but nine times earnings, 3.8% dividend yield, may be worth a look.
Hill: Is a loyalty reward program now table stakes for any retailer? Is it a red flag if a retailer doesn't have one of those?
Gross: It appears to be. They appear to be actually working across the board, whether it's something like Restoration Hardware or something like Big Lots.
Hill: Q2 is a software company that helps banks of all sizes offer their customers digital services, services like mobile banking and online bill payment. With a stock up more than four times in value over the past five years, Q2 has paid big returns for investors.
Last week at our member event in Austin, Texas, Motley Fool Chief Investment Officer Andy Cross sat down with Matt Flake, the CEO of Q2. They discussed security, the future of banking. Andy kicked off the conversation by asking Matt Flake about the business of Q2.
Cross: You have about 400 clients, mostly focused here in the U.S. Talk a little bit about Q2, the business and the software, and what you specialize in and how you serve your clients every day.
Matthew Flake: My mom always asks me, "Have you signed Wells Fargo yet?" There's Wells Fargo, Chase, Bank of America, and Citi. Those are the four banks that are vastly different than almost any other bank in the United States, or the world, for that point. There's about 11,000 banks and credit unions in the United States, and our market is all of them, but we service about 100. They build their own stuff and they live a very different life in how they do technology. But for the rest of the financial services space, whether it's fintechs like Acorns or MoneyLion or Square or finance companies that do leasing and lending, or community banks and credit unions, that's who we provide technology to.
Our technology essentially takes the data that resides in these back-office systems and allows you as an end user, a small business or corporate customer, or retail customer, to do your bank, see your balance, transfer funds, pay your bills, pay your payroll. If you think about what's happening in the world today, if you watch TV, every TV show, there's one advertisement from a financial services company about getting a loan, making a deposit, where to use your debit card. That pressure is mounting itself on these types of financial institutions. Our technology allows them to go compete against the people that are doing the advertising -- Bank of America, Wells, Chase, Citi. A huge market opportunity for us.
We had our investor day yesterday up in New York. We talked a little bit more about the business. When we went public in 2014, our total addressable market was about $3.5 billion. We were zeroed in on virtual banking and digital banking, which is the deposit side of the house, where you view your balance and transfer funds. We have expanded with our product suite. Now we do loan origination, we do some banking as a service. What that has done is expanded our total addressable market. We announced yesterday that our total addressable market has gone from $3.5 billion to $8 billion. It's a dramatic increase over the last five years. The opportunity continues to grow.
Cross: That's awesome! Congratulations! A rather significantly large merger announced between two larger banks, SunTrust and BB&T. Combined, maybe $400 billion in assets. Talk about consolidation, how that impacts your business, opportunities, challenges of the small regional bank world. And what might this mean for your prospects when you look at the next five years?
Flake: There's consolidation happening. SunTrust and BB&T is one example, but the M&A activity in the banking space has been well documented. For us, what drives our revenue are the people that have accounts at community financial institutions. There's no doubt that you're going to see fewer banks and credit unions. As I said, I want to have a lot of community banks and credit unions, but I don't know that we need 11,000. Five thousand or 6,000 is probably a good number. I think that's probably where it's going to land.
They're merging with each other. Bank of America, Wells, and Chase and Citi aren't buying them. What's happening is the billion-dollar banks are becoming larger. That's our sweet spot. We don't do a lot on the $200 million and below unless they want to use technology as a way to compete. The merging market, they're merging with each other, they're not going out of business. We're driving more usage through the platform that way.
When we went public in 2014, we had one bank that was greater than $10 billion in assets. Today we have 30 that are greater than $10 billion in assets. All that's a function of the consolidation. Some of those are new, but a lot of that's growth that's occurring through acquisition. Because strategic financial institutions are buying our platform, those are the ones that are doing the acquisitions. If you think about it, I'm not going to go pay more for a technology platform if I plan on selling the business, but I will go buy a top-end technology platform if I'm trying to grow and be around for a long time.
Cross: The name Q2, if you want to share some insights into where the name came from? And the brand of Q2, how do you continue to support and grow the brand? How do you think about the brand of Q2? If you do at all. It may just be a software solution.
Flake: Hank started a company called QUp, which was quotes and updates. That was the one he started in the mid-90s, when I started working for him. That business sold to a company called S1, it was an exponent. A lot of different things happened with that transaction. Hank wasn't very happy about the way some of the customers and employees were treated, so then he started Q2. The tag line was "exponentially better." I had to explain to Hank that that means nothing to anybody other than the other people. But we've gotten all past that. That's Hank, he's the chairman, what are you going to do?
Cross: That was $3 billion ago.
Flake: Yeah, right. It was fun. From a branding perspective, we're trying to drive the brand globally now. We have operations in the U.K. and ANZ and India. Trying to drive the brand more. We have not been known as a big marketing company, pushing our name. That's somewhat representative of Hank. "Let's just go execute. People will hear about us." I don't know if that scales globally, so we're putting more into the brand around Q2, as you'll see more. We're excited. I think we're going to have the website q2.com instead of q2ebanking.com soon.
Cross: Thank you very much, because we go to your website a lot. We talked a little bit before we came on stage about the regulatory environment, how that might change with whoever's in the various divisions of government. Talk to us a little bit about the regulatory environment right now. How is that impacting either the opportunities for Q2 to continue to promote your solutions as being superior, and challenges that it might possess as well?
Flake: Just to put some context around that comment, Andy and I were talking about how 2016 -- let me just frame this by saying, my mother, if Jimmy Carter and Oprah had a baby, that would be her; my father, just to the right of Genghis Khan. He has a gun and a W sticker on the back of his truck still. Obviously, the marriage didn't work. But I'm neutral as can be on politics.
In the middle of '16, when it started become apparent that it was Hillary or Trump, one of those two, decisions stopped. If you're in a regulated business, those were very different things. Elizabeth Warren and Hillary Clinton were going to come in, so I have to figure out what's going to happen, because there's going to be a change in the regulatory environment. Then, November, Trump happens, and then it changes. We were talking about, in '20, what's it going to be like? [laughs] I have a feeling it's going to be two very contrasting decisions. So, in a regulatory environment, that's one of the things that we're trying to get our arms around, what's that going to mean? If it's Bernie Sanders, Elizabeth Warren, whoever, on the other side of it, vs. Trump, or if there's a third -- it could freeze decision making.
Regulations are things that actually are barriers to entry for other companies. It's a competitive advantage for us, but it also creates a lot of cost and burden for us and our customers. So, from a regulatory perspective right now, the regulators are finally getting up to speed with where the cloud is and where technology is, which is a good thing. Our customers are getting more comfortable with it. We spend a tremendous amount of time educating them on security vs. running it in your own facility, and the amount of money we spend. It's a differentiator for us.
But in 2020, who knows if it could be a slowdown or not. I will say that one of the things is, we're a vastly different company than in 2016. We have far more products to cross-sell. So if you do have a slowdown in decision making, people will lean on more cross-sells. So I feel better about 2020 now than if it would have been '16.
Cross: Great! How does Q2 technology make my accounts more secure?
Flake: From a technology perspective, on the security piece, we started using machine learning in 2009. We hired mathematicians from the University of Texas to come in and look at the behaviors as they occur on devices. When you log in, who you pay, how much you pay. If you think about you or a business, we usually receive money about the same day of the month. We pay the electric company, the cable company all about the same day of the month. The amount's about the same. You usually login from your computer around the same time. When those behaviors are outside of that, we have machine learning that says, "This could be the person it's saying it is, but it's not normal behavior." So we can stop that transaction. There's that layer of it.
Then, there's the layer around, I would encourage anybody in this room to not use email as a way to get your password. If somebody sends you an email, "Here's your new password." The text is a much better way. Get a text. It's much harder to spoof. I was always telling people, my mom is the weak spot in the chain, not the data centers and those things. The hackers have gone after phishing emails and those things to get your information and then go scam you. We put $150 million into infrastructure, which includes gates at the front of the data center, to prevent these types of attacks that go on. But I encourage people to...I wouldn't do much banking via email, let me just put it that way.
If somebody that tells you that if you just put some money in your account for a couple of days, and you can keep a little bit of it, it's probably a scam.
Cross: [laughs] Especially if they're from Nigeria, stay away from that!
Flake: Yeah. Or, if you fall in love with the guy in Afghanistan, and he just needs some money, and he's a soldier. He may be -- I hate to discourage that -- but, he may be a scam artist, too. Maybe wait until he gets home.
Cross: What's one of the top characteristics that you and Q2 look for in hires, when you hire?
Flake: Hank says hire the heart, train the mind. But I like to hire smart people, too. But big hearts is the best combination.
Cross: That's great!
Flake: We look for people that are passionate about what they're doing, eager, ready to learn, humble. That seems to be a winning formula!
Cross: It sounds like Hank and Roy Spence and Herb Kelleher, all cut from the same cloth.
What's the best piece of advice that you've ever got?
Flake: I'm kind of a quote-of-the-day guy. I heard one recently that stuck with me, which is humility is not thinking less of yourself, it's about thinking more of the other person. I just think it's really important. Humility, the longer you can carry it with you, the better. You'll learn more, people want to be around you more. It's just a better place to be. So I like that advice.
Cross: If somebody had to tell me about you, one strength and one weakness, what would they say? Someone you worked with?
Flake: I can give you the weaknesses. He's never happy. He focuses on the 5% of the problems, not the 95% of the things that are working well. The other thing they would probably say is I'm not above anything. I'll lead from the front. If I have to get on a plane with somebody, I'll do it. If I have to stay up late, I'll do it. I never forget my roots, where I came from.
Cross: Still to this day, you meet with clients quite frequently?
Flake: Two of them a day.
Cross: How has your leadership changed over the last decade, especially going through the financial crisis?
Flake: Moving to the mission-driven company -- 10 years ago, I wouldn't say we were as mission-driven as we are now. I just realized that if I can just get people to connect with what they do every day and be passionate about it, it may be community banking, it may be -- I love community financial institutions, but I'm probably prouder of the fact that we've paid $700 million in payroll, and that's gone into the system. Plus, the people have built buildings for us, the lawyers, real estate, the accountants, everybody. The money that goes into the economy. Hank had one idea and put his money behind it, and that has led to a lot of wealth transfer. We've had more than 100 people that are employees of the company that are worth more than $1 million on paper. Most of them sold it long ago, and they have depreciating assets in the parking lot. But still, if they had held it, they would have done well.
Hill: That was Matt Flake, the CEO of Q2. Coming up, we've got a few stocks on our radar.
Our email address is [email protected]. From Ben Farber, who writes, "I'm a subscriber to several Motley Fool services and consider myself an avid listener of MarketFoolery and Motley Fool Money. I'm not a shareholder of National Beverage Corp, but I saw their latest earnings report and I think it's a contender for most unhinged company press release. I'm interested if you agree. Love the shows, keep up the great work."
Thank you, Ben, for the question! For those unfamiliar, National Beverage, the parent company of La Croix sparkling water, came out with their third-quarter report. Shares down 20% on Friday. Chairman CEO Nick Caporella blamed the drop in sales and profits on, and I'm quoting here, "injustice." He wrote, "We are truly sorry for these results. Negligence nor mismanagement nor woeful acts of God were the reasons. Much of this was the result of injustice. Managing a brand is not so different from caring for someone who becomes handicapped. Brands do not see or hear so they are at the mercy of their owners or care providers who must preserve the dignity and special character that the brand exemplifies. It is important that La Croix's true character is not devalued intentionally in any way. National Beverage Corp is and will remain the preeminent innovator that adds zest and authenticity to the sparkling water phenomenon in North America."
I'm stunned by this! I'm stunned that a lawyer at the company said, "Sure. Go ahead and put this out." "Unhinged" is one word to describe this.
Gross: Yeah, if you told me that was a tweet a la Elon Musk or something like that --
Hill: John Legere, T-Mobile.
Gross: -- I would be like, "OK, that's still kind of weird." But this is a press release! Reviewed by the company, the CFO, the general counsel! I would imagine the employees around that CEO are just scratching their heads.
Moser: That guy's full of something.
Gross: [laughs] Full of fizz!
Moser: Listen, man, I'm a big seltzer drinker. I love it! But I find myself buying more of the store brand seltzer than La Croix. We were talking this morning, Ron agreed, they have some really funky flavors.
Gross: Coconut turmeric!
Moser: Maybe the injustice is they can't give me a simple lime seltzer!
Cross: There's also more competition, too. There's more lines at Whole Foods, when we walk down the street to our local Whole Foods. We're seeing those. I see them more in the office, those competitors. They're not the only play on the block anymore.
Gross: Coke has one, Pepsi has one.
Hill: I was just going to say, look at the biggest carbonated beverage companies in America. They're pushing these brands even more.
Gross: Investment from Guggenheim just moved to a sell recommendation actually, which you don't see very often, because it's going to be hard for them to regain market share.
Cross: And you see a lot of discounting in that space. Again, grocery stores becoming more and more cost-competitive. La Croix is getting more and more discounted shelf space.
Hill: Let's get to the stocks on our radar. Our man behind the glass, Steve Broido, is going to hit you with a question. Ron Gross, you're up first. What are you looking at this week?
Gross: Following our conversations about Costco and Big Lots, I'm in a discount retailer mood. I'm going with Dollar General, DG. Operates more than 15,000 stores in 44 states. They're going to report earnings on March 14th. The company cut their full-year guidance when they released their third-quarter earnings. I'm curious to see what this report looks like. There was a lot of weather-related issues in that last report that theoretically shouldn't be repeating themselves. They expect to deliver their 29th consecutive year of same-store sales growth with this report. I'll be keeping an eye out.
Hill: Steve, question about Dollar General?
Steve Broido: I haven't seen a Dollar General around the D.C. area, but I've been to one somewhere in Maryland or Virginia. What exactly is Dollar General?
Gross: It's a retail store where you can get inexpensive merchandise, often at $1 or below, but not always. It's similar to a Family Dollar, which is also part of Dollar Tree.
Hill: Jason Moser, what are you looking at?
Moser: When I first mention billboards and surety insurance, it may not seem to go together like peanut butter and chocolate, but, Chris, Boston Omaha, BOMN, is making a very good business out of it. This is a small-cap business that is led by two founder leaders. Building up strong business in billboards, those ones you drive by on the interstate. An attractive surety insurance business as well. I'll give you a little bit of a heads-up here. On Monday's Industry Focus, I am going to air an interview. I recently sat down with our own Buck Hartzell here. Buck knows this company very well. He's spoken with management before. We dig in a little bit more on Boston Omaha and present why it looks like a compelling investment option.
Hill: And the ticker?
Moser: Ticker is BOMN.
Hill: Steve, question about Boston Omaha?
Broido: I'm going to ask a similar question. What is this company? I don't understand. They make billboards? What's going on?
Moser: [laughs] They own and monetize billboards that are on the roads everywhere. They also run a nice little surety business on the side.
Hill: Andy Cross, what are you looking at?
Cross: Ulta Beauty. Operates 1,200 beauty stores around the country. They report fourth-quarter earnings next week. They have 30.6 million loyalty members. That's up 15% over the past year. Those people generate more than 95% of total sales of the company. I really want to see that number continuing to grow. That means more comp store sales growth of 8% to 9%. Anything above that is a bonus.
Broido: I do know Ulta, so my question is, is it the salon business that they're most well-known for? Or selling cosmetics?
Cross: Selling cosmetics.
Hill: Three very different businesses, Steve. You have one you want to add your watch list?
Broido: Well, there's only one I understand, so I'm going with Ulta Beauty. Sorry guys, not my best work today!
Hill: Jason Moser, Andy Cross, Ron Gross. Guys, thanks for being here! That's going to do it for this week's edition of Motley Fool Money. Our engineer is Steve Broido. Our producer is Mac Greer. I'm Chris Hill. Thanks for listening! We'll see you next week!