In this podcast, Motley Fool analyst Bill Barker and host Deidre Woollard discuss:
- The power of Chewy's auto-ship service.
- If Chewy's growth is too dependent on macro trends.
- What factors could lead to a Dollar General turnaround.
Motley Fool host Mary Long talks with Dexcom CEO Kevin Sayer about the impact of weight loss drugs on diabetes care.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec. 07, 2023.
Deidre Woollard: Are you giving your pets gifts for the holidays? You're not alone. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool Analyst Bill Barker. Bill, how's it going today?
Bill Barker: It's going well. Thanks.
Deidre Woollard: Glad to hear it. Well, yesterday on the show, Dylan and Bill Mann, I believe, talked about people's food. We're going to start with talking about pet food with Chewy earnings, so Bill, I got to ask you, I know you have pets. I believe you have a dog. Are you a Chewy subscriber?
Bill Barker: I've seen some people rave about their Chewy's experience, but I get food delivered regularly by Amazon and haven't ever given it a thought as to why would change.
Deidre Woollard: Do you have a subscription with Amazon, or do you just buy food when the bowl is empty?
Bill Barker: There's a subscription for some of the food and other parts of the food when the bowl is empty. One of the dogs is on prescription food right now, so I can't just get that as easily as otherwise. But it's a problem for Chewy is that there aren't enough people like me thinking about getting multiple dogs out there. They need more customers it seems like.
Deidre Woollard: I think so. Well, it's interesting because you get the subscription, but you get it through Amazon and Autoship is huge for Chewy two, it's about 76% of their business according to their earnings, and I find that interesting because I have a cat who's also on prescription food and also gets prescription medicine because he's itchy, and so we have Chewy for the medicine, but not for the food. The medicine is a big part of Chewy's business as well. Seems like a bigger part. But you're right, the earnings were, they weren't great. The customer count was down by 1% That's not great. This is a pandemic darling. But what impressed me was how much money everybody continues to spend, net sales of $543 per customer up year, every year by around 14%. They're trying to grow customers, but they also are trying to keep people spending some of that is the pharmacy part. But are they putting too much faith in how much we love our pets? I don't know if you've seen those commercials that she always been running, but they make it seem we are just ready to spend everything on our animals.
Bill Barker: I guess if they're betting on an increased trend in what is termed, in some places, pet humanization, then that's one way to go. They are going to run into a limit on that before running into a limit on the possibility of acquiring more customers pointed out that there was a COVID darling. I think a lot of the growth was pulled forward. There was an interpretation of the mass adoption of pets as something that was the beginning of extended period of the growth in the pet markets rather than just a pulling forward of future growth, and the stock price reflected that in 2021 and not ever since. This is a stock that's been globeredis. Reality has been delivered rather than the fantasy that was hoped for by not just owners of this stock, but a lot of others that saw changes in behavior over a short period rather than fundamental changes in behavior over a longer period.
Deidre Woollard: That is one of the things that I'm asking myself about, about this stock as well, this one, and the one we'll talk about later. Not a good year for either, but one of the things I mentioned on the call was really strong Black Friday and Cyber Monday. It's gone down now since then. But this thing about people buying pets gifts, do you buy your dogs gifts?
Bill Barker: No. There have been some impulse purchases at times, but I've been asked by the kids, it's so and so's birthday. What are you getting her? I just take the cat, the dog. They don't know anything about that. They just want a little more food. That's what they really want. But certainly the opportunity to buy costumes at Halloween for your pet, it doesn't seem to be a thing that the pets want. But a lot of these gifts are things that people want more than the pets want.
Deidre Woollard: Well, Chewy's betting on this idea of pet parents, or paw parents, depending on who you talk to. With this idea that your pet is family and you have to treat them like family, which I don't know. I love my cat, but I'm not sure I consider myself my cat's parent. Looking at Chewy tough here in the market, as we've mentioned, part of that losses, this is what the market really didn't like, and they're still a really young company. They're still growing. They're expanding into Canada. They're working on streamlining all of their shipping and things like that. I'm wondering, do you think the market has less tolerance for a company that isn't a tech company? Because losses seem to hurt more if you're not making software, from what I can tell.
Bill Barker: Well, if you're not growing that fast and you're losing money, that's a bad combination, always has been. You can defer the making money while the growth is exceptional. But when the growth becomes something that you could measure against lots and lots of other things, and ones that are making money, you suffer by comparison. When you depart the category of 20, 30% whatever it might be, annual growth, and you wander into high single digit, very low double digit, which is about as high as you might rationally predict for Chewy. At this point, the question turns to how does that stack up in terms of profits and poorly is the answer today.
Deidre Woollard: Badly yes.
Bill Barker: Then you're, well, who are the most likely buyers and owners of the stock? It's people who buy the story and either have just unshakable faith in management, or think there's a hiccup going on or something like that. But you're getting into fewer and fewer buyers just when you don't have either strong growth or any profitability. Now, there's future profitability, I suppose, in this company if it focuses on that. But it's still saying that it's a good growth story.
Deidre Woollard: That is the interesting thing is that it was maybe being seen as less of what it is, which is, e commerce, and seeing it more as some new type of company. The question I'm asking myself about it is, were the expectations too big? Because we've seen that with a lot of the pandemic darling is that they had growth, and we just thought, oh, the sky is the limit, and then we came back to reality. It's like maybe this is a smaller business than we thought. You mentioned earlier the idea of people need to be getting more pets. I mean, that's one of the issues that is happening. Adoption rates are down. We're not getting as many pets as we did when we were all home during the pandemic, and one of the things that I think about with this company is macro pressures. You've got the pressure of people probably will continue to spend on their pets, maybe spend a little less. You know, that's a concern. The other one that I think about which is off to the side, but the idea of household formation. My theory is if rents are more expensive, maybe people are living at home longer, maybe they're not going out and on their own and then maybe you won't get pets. With all of this stuff, is Chewy just a smaller business maybe than the market really wanted it to be?
Bill Barker: Certainly than what the market wanted it to be back when the stock was 5x6x. What it is today, the growth was understood to be a function of that real step up during the pandemic, and then just stretched out as people would maintain their pets and get more insurance for them, and the pets would age and they'd have more prescription medicine and everything, and there were many new pet owners and they would become lifelong pet owners. Well, some of that has played out. The pet market is bigger today than it was in 2019, but it's still digesting a lot of people that aren't going to turn out to be longer term or lifelong pet owners, or because they don't have the choice to work from home, can't maintain their pet the way they had or the way the pet wants to be cared for. There's continued digestion of the growth that occurred, and for a company that was in the high-growth category, that's a difficult thing to navigate.
Deidre Woollard: True. But the thing I do love about this is those auto ship numbers. I think that's a great thing to keep watching for this company, and as long as they keep having that and they keep growing spend, hopefully, they sort out some of the other stuff and learn to cut costs a little bit.
Bill Barker: People will continue to receive the food and then the food will continue to get eaten, and it is convenient to have the autoship like a subscription? It is a subscription, so that is a more stable source of revenue than otherwise. But as the numbers this quarter showed, that's not enough to produce the top line growth that the stock needed.
Deidre Woollard: I want to pivot and talk about another company that reported earnings which is Dollar General. It has not been a great year for them, either, not in the market or certainly in the court of public opinion. There was a Bloomberg cover story in September about Dollar General employees saying it's a terrible place to work. But I started getting interested in this one after that I read that story. Not a great look for them. But then they brought back their former CEO, Todd Bassos, in October. I'm starting to look at this one as a turnaround. One of the things that they announced, not on this call, but before that, was that they're investing $150 million in labor hours. They're focused more on the stores, on addressing some of those customer service problems. Some of the issues with shrink that they've had. In general, you've got a CEO coming back. How long do you give them, is it like a new CEO, where you say, it's got to be a full year. But if you've got a CEO coming back, they already know the company. Do you want to see action and results a little sooner?
Bill Barker: Yeah, well, I think one of the things that you're going to see, and you saw it perhaps already, is the big bath quarter where you put a lot of the bad stuff into your first quarter, maybe two quarters of results for the CEO. Some charges, assess what you can put into the past and put it into one big bundle and then start talking about the future. I think that certainly with a returning CEO, he's going to be much more tuned to exactly where the bodies are buried for this company and a very detailed knowledge of what does and doesn't work. Not only in the industry generally, but with the company specifically. It's not a function of a company that needs, I think, a new pair of eyes to look at it. An old pair of eyes had great success, left at the right time, perhaps. But you only have to go back a year to have the stock double the price that it was that it is today. Prior to the last 12 months, it was a fairly smooth 15 years for the company. I think that the odds in the market with markets betting on is a return to the past. That's a pretty good story for shareholders, whether it develops as you say. That's a question, how much time you should give. I would say just a couple of quarters, you'll see something.
Deidre Woollard: Yeah, I think what you just mentioned is why I'm interested in this one, because it was a good performers, it's a good dividends, it's been a good stock and then it's had this bad year. Now it seems maybe this is like their dominoes pizza moment where they admit that hey, there's a problem. But I think one of the things that's interesting for them, so not a great quarter, same store sales down a little bit. But they're putting a lot of their energy into growth. Maybe this is part of that, get all the cost stuff out of the way, because their real estate plans are ambitious, 800 new stores, about 1,500 remodels. You think sometimes as a CEO comes in, they want to trim costs, trims the sales. This is the opposite approach, and I'm wondering if that is because Dollar General, the Dollar stores, they have this captive audience. I think maybe they figure they increased, get more people in the stores, increase quality, maybe they increase sales. Is that something we should be looking at as part of the thesis here?
Bill Barker: Well, the growth here has to be put into context, 800 stores. I think they've got 15, 17,000 right now there.
Deidre Woollard: Yeah, they've got a lot of stores.
Bill Barker: I'll talk about the Dollar stores in general for the category there are 37,000. To put that into a bit of pointless context, you could visit one every day for 100 years and not have yet visited them all. If that were a worthwhile thing to do with your next 100 years, I've given you that idea. [laughs] There are plenty of them out there, 800 more isn't really as big a number as you might think given the installed store base already and the availability of them. But there are probably 800 reasonable locations. When you map that out over a few years. I think the remodeling is also a big part of this and I wouldn't doubt that there are, well, more than 1,500 stores that look like they could use a little remodeling out of the entire account. I think they've got plenty to do. They've got to get by these OSHA reports and the employee safety problems and fines that they have accumulated over the years and have been back in the news this year. You know what you're getting when you go into a Dollar General. But they can up the experience, if they choose to use their money that way. They've, I think, discontinued their share buybacks so they've got some more money available to dedicate to that. Up to a point which is up to the point at which the debt becomes a problem, because this is a company that has plenty of debt.
Deidre Woollard: Yeah, that's a good point. When you're assessing this as a potential, turnaround, there's just a lot of factors and I'm thinking about the Dollar stores in general, a lot lately because I'm thinking about shifting consumer behavior. What could be next? We've talked so much about consumer spending. I find it interesting looking at Dollar Tree versus Dollar General, because they're both Dollar stores, but you've got a different product mix. Dollar General is so much more tied to the grocery side of things. They're really are more in rural areas. Dollar Tree is starting to think like, OK, we're moving beyond the dollar, more expensive items. Dollar General, they're doing something different. They're putting in these DG markets. Dollar General markets, more fresh food. Looks like a grocery store, but like a very small grocery store. When you're thinking about Dollar General, what do you think about as, its role in the consumer spending cycle?
Bill Barker: I think more and more embedded with the consumables and the refrigerated installations. The food that has to be refrigerated, that they're selling. They're moving more toward consumer spending that does not change over time and is not particularly vulnerable to macroeconomic factors. People are going to come in frequently for their consumables, they're putting in more produce which will bring people in more often, because that's something you buy more frequently. I think it's a good plan to get people in more frequently, give them what they need most, and layer on some impulse purchases beyond that. It's very competitive. They don't have a mote. It's extremely easy wherever there's competition. Although in some rural communities are, they go to place in many others, of any greater population size, or growing population. There's going to be competition not just from Family Dollar, Dollar Tree or Walmart, slightly larger or significantly larger locations, but there's only so much you can capture before the online sales are also a threat. Their normal purchase is I think, less or around $15 per basket. That's not something that people are most frequently getting done online. How much they can grow that basket size without finding that they're running into competition from other and bigger players? I don't know. I think that's a bit of a cap. But everything up until about 12 months ago was generally successful for this company. They had, as I said, a good more than decade long, fairly smooth, story that people would love to see repeated.
Deidre Woollard: Well, I feel like both of the companies we talked about today are ones that we're going to want to see next quarter and because things have to go in a direction, at least. Thanks for your time today, Bill.
Bill Barker: Okay, thank you.
Deidre Woollard: If you're a regular Motley Fool money listener, you're probably well aware of how dividend stocks have the potential to really supercharge your portfolio's return. Dividends have accounted for around 40% of the total return of the S&P 500 since 1930. Of course, have been an important tool for all time greats like Benjamin Graham and Warren Buffett. Our top notch analysts at Motley Fool stock advisor certainly agree and have put together a list of five quality dividend payers that are also recommendations in our stock advisor service. The report is free to you just as a thank you for listening to our podcast. No purchase necessary. Just go to Fool.com slash dividends and we'll email it directly to your inbox. That's Fool.com slash dividends to claim your five dividend stock recommendations. Now we hear a lot about how weight loss drugs have the potential to upend more unexpected industries, airlines, gyms, apparel. But how are the leaders of medical device companies thinking about these new drugs? Up next, Mary Long talks with Kevin Sayer, CEO of Dexcom, about the future of diabetes care and the small monitor that's changing what that care looks like.
Mary Long: Maybe we can start by having you give us an overview of the history of diabetes care and how Dexcom came to really be a pioneer in continuous glucose monitoring.
Kevin Sayer: A great question. I personally go back in diabetes care back in the mid '90s. I started my time in diabetes at many med diabetes which Medtronic bought, and is there diabetes arm right now. With diabetes care, particularly those on insulin, there's always been several problems that need to be solved. Insulin was the first big one and what a great discovery that was then how's that insulin delivered? More importantly, what information do people use to manage their diabetes health and figure out how much insulin to deliver. Over time, the way people did that in the beginning was like urine sticks and then finger sticks where people would prick their finger and you would prick your finger and get a number and say, based on that, this is how much insulin I'm going to take or what I'm going to do, which is like watching a basketball game and looking at the score in the middle of the first quarter and deciding who's going to win, it doesn't work that way. I experienced the vision or the experience of continuous glucose monitoring way back in the '90s when I was there and then had the chance to come to Dexcom.
But quite honestly, the most difficult problem to solve an intensive insulin therapy is what is the information I'm going to base that decision on. What continuous glucose monitoring gives individuals is the opportunity to look at their glucose all the time. Our numbers go directly to your phone. We want to meet people where they are. They get a new glucose value every five minutes. Then we have alerts and alarms and system features that literally enabled them to be safe and more healthy than they would ever be without it. We've gone from a position, particularly with insulin users way back in the day. I've been in Dexcom now for 12 years full time. It took a long time to get somebody to get CGM to where now we're covered by all major insurance companies where the most affordable reimbursed solution there is for glucose monitoring. Most kids, if they get diagnosed with Type I diabetes now, or insulin, they leave with a Dexcom. They're not going through what everybody went through in the past. This has evolved to really become the standard of care there. We believe we have a lot more runway in other areas going forward.
Mary Long: That evolution that you mentioned, I've heard you say before that part of what Dexcom is and has been doing is really building an entirely new industry. Can you explain a bit what you might mean by that?
Kevin Sayer: Yeah and again, I'll go back to the beginning. In the beginning, insurance companies really didn't even want to pay for this because it looked like we're adding more costs to the system. We had to go create models to whereby we could get this reimbursed for people to use. We decided as a company that we wanted to take this technology to the phone. We were the first medical device of this nature, of this classification to go directly to a phone. When we went to a phone, all sorts of windows opened up because we enabled people to, for example, to share data with others. We rang the Nasdaq bell a couple of weeks ago and I talked to one of we had a lot of what we call our Dexcom warriors there, people who represent our company, who use our product. One was a young woman who told me a story. She's from Australia and she was asleep in a hotel room at 04:00 in the morning when people broke down her door because her blood glucose had gone low. Her friend in Australia had seen it because she followed the data on the phone, come by the hotel and saved her life. We've created situations and things of that nature to help people in their care. We've also created an industry with respect to interoperability. We share our data with other companies. We enable insulin pumps and algorithm companies to have automated insulin delivery to give people better lives. We share our data with apps with companies, nutrition based, diabetes care based, whatever. If our data can make somebody healthier, we want people to use our data where they can. Every first in our industry has been created by our company.
Mary Long: Dexcom is not the only company that makes a CGM device. Your chief rivals are Abbott, which makes the Freestyle Libre and Medtronic. Those are both large like diversified medical device companies. Dexcom, does Dexcom, end of story. How does that singular focus help you and hurt you?
Kevin Sayer: I consider it an asset primarily, but let me talk about how it helps us first, that singular focus means we have to be extremely clever and innovative. The list of first I came at you with earlier, going to the phone first, the first interoperate system and our level of accuracy and performance, the reimbursement we've obtained, we have to lead this industry. We can't follow the other guys. We've always prided ourselves on having the best product and that has given us a tremendous advantage over time with respect to accuracy and performance where it's difficult. The things I think about when I think about our competitors quite candidly infrastructure as we look at new geographies go into, for example, we don't have a cardiovascular business in Bulgaria, or pick a country, we have to very selectively pick where we're going to make investments and how we're going to grow international. These other geographies, because we don't have other businesses there. We have grown very methodically, very thoughtfully, very creatively, over time, internationally, and scaled our business that way. It's lack of infrastructure, but we've built it nicely. We've more than doubled the number of employees that we have in the past three years. For example, as we've built infrastructure out again while growing profitably.
Mary Long: The latest iteration generation of your CGM device is the G7, and that launched earlier this year. That rollout happened all around the world at the same time. Seems like that was a success. You raise end of your [laughs] guidance after posting your most recent results and are now targeting $3.575- 3.6 billion in revenue, which is about a 23-24% year over year growth. I'd imagine that there's a lot of planning that goes into that launch and also maybe a lot of chaos. What did you learn from that experience? Maybe what will you do differently when the G8 one day comes out?
Kevin Sayer: We've learned a lot of things. That's really a good question. Our G6 launch that happened five years earlier, we weren't ready for, we were literally running out of inventory almost on a monthly basis. If you ask my team. We were holding the business together. We're still growing well and we were doing fine. But it was really tough. We plan this launch much better from a supplier and a capacity perspective, and I've had no product shortages whatsoever. We also matured our development process enough to whereby we launched this product in a much more mature manner than other ones. You always have things you can improve when you launch your product. But I think the product was launched maturely and in a very good state. The other thing we learned is about our technology in general. People love our old product because it saves their life. It's been such an integral part of their care that while the other product is smaller and more accurate and reimbursed and affordable, there's emotional difficulty sometimes in switching for people. Because again, we've been front and center in their lives, people are switching out that are on the G6 system. Most of our G7 users are new to Dexcom. They're not G6 switchers. We've been able to access a lot more physicians as far as prescription, 18,000 more physicians in the US have written Dexcom scripts than had written scripts a year ago. Because the new product has so many great features with respect to a smaller size, it's ease of use. The new app is really strong and phenomenal. I think the launch has been very successful and with G8, I think what we've learned is we'll just apply those learnings. Let's make sure the product is ready. Let's make sure it's baked. Let's make sure we identify the features that people need to put into it. I think we did a very good job of identifying what our users we're going to want. Let's figure out what that next level of features is and build on that platform.
Mary Long: When you think about the future of Dexcom and future iterations of G7, G8, what have you? You seem to have a really close relationship with patients, with the custom consumers that use your products. How do you source feedback from them and then incorporate that into future iterations of this device?
Kevin Sayer: We continuously pulse our customers and ask for their feedback. We monitor social media very closely. The diabetes community is not quiet, they're pretty vocal. In fact, I got some great feedback when we were in New York ringing the bell. We had a dinner. We brought a lot of, again our Dexcom warriors back. We had a luncheon form. I sat at a table to get feedback from an eleven year old, a nine year old and a seven year old. And I said, OK, tell me what you would have us do better. It's really fun to ask the question and they all had really good answers. They want us to make the product last longer and we've committed to going from a end product to a fifteen day product over time. They talked about a couple things in the app they'd like to see. These kids, imagine being seven years old and having to manage taking shots every day or an insulin pump that's giving you insulin. When you ask a seven year old that question, you'd be shocked at the maturity of their answer. I'd like a different adhesive that does X, Y and Z. Okay, we can do that. We ask directly, pulse directly. We spend time with social media. Again, you talked about us being a regulated company. We also have to recognize that whatever we do is regulated and we have to make sure people are safe and it is a wind, we balance all of that.
Mary Long:Weight loss drugs have been a hot topic this year. There are plenty of bearers that are saying that this is going to change every industry, not just things that are seemingly related to weight loss drugs, but even airlines are going to change their entire set up. Perhaps unsurprisingly, part of that conversation has involved diabetes companies and companies just like yours. Yet again, you posted this amazing quarter most recently. I think even cited a study that says, well, actually use of these GLP-1, these weight loss drugs, supplements and increases use of CGM products. Can you talk a bit about how you see the future of weight loss drugs interacting with your product?
Kevin Sayer: Yeah and look, this drug category is amazing. The results that have been produced have been absolutely amazing. But there's never been a time when people wouldn't need CGM as a result of everything that's been learned. The thing that we talked about was data that we've garnered through very strong data sources. That people who go on these weight loss drugs, like people who have type two diabetes, who are on basal insulin, if you added GLP-1 to their therapy. If you add CGM, their outcomes are better. The outcomes of these people all get better if you add CGM to those therapies across the board, if they're on intensive insulin therapy, basal incent therapy or just somebody with type two diabetes and you add a GLP-1 to what they're already doing because it gives you a real time scorecard, you learn throughout the course of a day. For example, if you're on one of these weight loss drugs, look I can keep my glucose at a pretty steady state because I'm not eating as much. But you also learn very quickly, and a lot of us as executors of our company, we are sensors all the time without diabetes. You learn what specific meals do to your glucose and to your health. It definitely can create a better experience. It can also create better adherence to the drugs. One of the things the payers are concerned about in reimbursing for these drugs, are the patients going to comply? You can tell very quick from a CGM if somebody is complying, because you can see how steady their glucose is and how the spikes are not as big as they used to be before they were on these drugs. I think we can be a great scorecard for this. I think over time we can use the performance of our system combined with other data such as activity data, sleep data, whatever data we can incorporate into our data ecosystem and creating experience that can help people be healthier across the board. I never thought for a minute that these drugs would exclude TGM. I think we can become a vital part of it. We just have to define that, just like we've defined our place in the insulin-using world. Now, Basil's insulin. We'll define our place in this one too and I think we'll do very well.
Mary Long: This takes this a step further. But our co founder David Gardner talks a lot about the importance of investing in companies that are building the future you'd like to see. In so many ways, right, Dexcom is building a better future. But ultimately, CGM devices manage diabetes rather than cure or eliminate it. So how does Dexcom fit into this futuristic world in which maybe diabetes doesn't exist?
Kevin Sayer: Well, type 1 diabetes isn't going to be affected by these drugs. There could be a cure some day. There are many programs where people are trying to get cures and that would be a tremendous outcome for everybody. Let's be very clear, but at the end of all this, you're going to need a scorecard and people are going to need to see how healthy they are. Even again, if type 2 diabetes is delayed, you learn so much from wearing a CGM. You learn more from wearing a CGM about your metabolic health than almost anything you can do. We believe we can create experiences that fit right along with all of this and as somebody has pre diabetes or for example, gestational diabetes. We had a label, we can now be used in pregnancy. Well, I have grand babies that had a gestational diabetes, I have a gestational diabetes daughter in law, and she was sticking her finger for the first couple of weeks, she called me up, can you give me one of those? It made nine day difference and my twin grand babies are here largely came when they needed to come because she wore a sensor. We have a place across this healthcare spectrum and glucose state is going to be important enough that we'll figure out where to get it in. I think this noise will eventually quiet down and will be an important part of this community.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard, thanks for listening. We'll see you tomorrow.
