In this podcast, Motley Fool analyst David Meier and host Deidre Woollard discuss:
- Chewy's customer growth problem.
- If Chewy is the future of veterinary care.
- The picks-and-shovels play behind sports betting.
Motley Fool host Mary Long interviews Lauren Sherman, fashion reporter for Puck on two retailers looking for a turnaround.
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 March 21, 2024.
Deidre Woollard: Let the March madness begin. Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst David Meier. David, how is your Thursday going?
David Meier: It's going great. How is yours?
Deidre Woollard: [laughs] Pretty good. I've wanted to dive in first and talk about Chewy. This company is interesting. We were talking about it before we started recording because we've seen the stall out in customer growth and they're telling us we're going to be there through at least the end of this year and next year. You've got this growth in sales per customer. People love their pets, they're spending on them. Total sales per person up $555 a year. That's up nearly 13%. That's awesome but this customer growth thing, how worried should we be about it?
David Meier: Clearly, you should be worried. You'd never want to see above-the-top-line metrics stall out. But I think a little context is going to be important here. During the pandemic, there was a pet boom and I think there has been a little bit of a "bust" if you will.
Deidre Woollard: We still have the pets though.
David Meier: We still have pets but anecdotally shelters are unfortunately seeing a rise in the number of animals that are coming in whereas shelters had no animals at one point, at least around in my areas. So, there's a little bit of that mix going on and a little bit of economic uncertainty, I get that from management, but I think we have to work through that boom if you will, get past that and get on a more normal trajectory but as you said, people who have pets still spend money on their pets for a variety of reasons and when we look at some of the profitability metrics, management is still focused on making sure that they take care of the current pet owners but also making sure that their business is more efficient, generating a little bit higher profit margins, generating a little more cash-flow which is a good thing.
Deidre Woollard: The auto-ship numbers, I always look at that with Chewy because it's so impressive. Up 8% in the quarter, up nearly 15% for the year. It's amazing and 85% of the business is non-discretionary so we're not going to stop feeding our pets but is there competition with Amazon, Walmart, others that might offer something cheaper and if we get toward a place where people are really watching their wallets, is that a concern?
David Meier: Yes to all of that.
Deidre Woollard: Yeah.
David Meier: First of all, the technologies available and the infrastructure in place for a wide variety of businesses to get product to people quickly, efficiently, that's going to benefit the consumer. We get it in the form of lower prices and faster delivery times and everybody, especially the Amazons and Walmarts of the world, they have the ability to do that but to your other point, there is some brand loyalty with Chewy. I have a nice big porch in front of my house and [laughs] I'm doing my part. There are Chewy boxes on my porch, on my neighbor's porch, on my other neighbor's porch all the time so I don't think it's necessarily just price, I think there's something more to it and so far Chewy has been able to use that to their advantage but obviously they going to keep working because the competition is not going to slow down.
Deidre Woollard: That loyalty aspect is interesting. One of the things we always talk about is they send you flowers, if your pet dies they do all these little things which is awesome and they've been able to keep that even as they scaled but I wonder how that translates to their big news. A few quarters ago the news was we're going international, we're going to Canada, then they're there and that's going but now their big news is Chewy Vet Care. Planning to open 4-8 clinics this year. First one I think is going to be near their HQ in Florida and they say this adds a total addressable market of 25 billion which is very substantial. I don't know though. I'm a little skeptical here.
I'm pretty loyal to the vet that I use. If they became a Chewy Vet I'd probably still go there, I don't think that's happening anytime soon. But I'm thinking about this move because it reminds me of what we're seeing in person care. Like CVS has the MinuteClinic. Walmart is doing this, Walgreens is doing this, Kroger stores. Everybody is putting a clinic in the stores. This is similar and yet different because Chewy doesn't do physical retail.
David Meier: Yes. I agree. It's similar but not quite the same and the way I might look at this is I compare it to something that I'm seeing in the dentist market, at which my daughter and her husband are both dentists, and one of the things that she worries about it as a dentist, and he worries about it as a dentist is how can I practice without necessarily owning a practice? There's huge challenges to be able to do that, so if Chewy can provide let's say the space and some of the infrastructure to a vet without who doesn't have to take on the additional risk of actually owning and operating a practice in terms of the financial risk of these things can be expensive.
It could provide some incremental benefit to Chewy as well as perhaps bring more, make more vets available. Which also if they're at a good price point, as well as taking advantage of the Chewy brand, maybe you get incrementally additional pet visits to a vet where you can use Chewy's infrastructure in order to get the things that you need from them. I can make the case that it's good but I can see exactly where you're coming from, where this out of your experience level.
This is not necessarily what you're good at. The good thing is I see single-digit openings. This doesn't seem like a big thing like we're going to roll out a multi-hundred of these in a year. We're going to try, we're going to see how it goes and we'll adjust accordingly. That should control some of the risk from a financial standpoint and help them get a cheap way to get some data to figure out, is this viable.
Deidre Woollard: Yeah. You've convinced me there like wait a second. That could be almost like a franchise model. But I'm glad it's a small test but I'm also wondering if this is just they had to do something. There's only so much time that you can talk about like we're cutting costs, we've got efficiencies and we have no customer growth cause you have to have something else that shows that there's a plan.
David Meier: I would say there's probably a little more emphasis on that in terms of they're certainly feeling the pinch of the above-the top-line metrics not going well but I would also hope that from a corporate evaluation standpoint that they've run some numbers and this is an adjacent for them. This is not coming out of left field-type event so I agree this seems different but again within their sphere of influence, not a big test, not going to cost them too much and the other thing that I thought was interesting that they mentioned was they've already staffed it. There's people who want to do this. Hopefully, that could be a good sign.
Deidre Woollard: Yeah. Absolutely. David, I know you're a sports guy and you happen to be wearing a shirt today that is clueing me into the baby that you're a March Madness guy but we getting ready for the playoffs. We've got NBA, NHL wrapping up March-Madness. It starts today. This feels like the perfect time to talk about Sportsradar but you've covered and it also reported yesterday. I'm not really familiar with this one but I looked at the presentation and the third year of over 20% top-line growth that stood out to me. Sounds to me like it's a picks-and-shovels play for sports betting. Is that what it is?
David Meier: Spot on as usual. Sportradar is a Swiss-based company and what it does is it licenses data packages from sports leagues around the world. When I say around the world, I literally mean around the world like cricket leagues in India and soccer leagues in South America. Sports leagues in the United States, wherever there's a sport, they want to be licensing data from the leaks. What they do with that is transform that into betting opportunities. They have a lot of experience. Costin Carol has been doing this for a long time. He's this founder and CEO.
They sell those betting opportunities to sports betting outfits around the world, like bookies in the UK, DraftKings, Flutter, FanDuel, things like that, as well as to media sites, content sites, so CBS Sports, Facebook. Wherever they think someone is going to want to interact and see a bet, they want to be there. But one of the other things that's happening is many leagues are trying to change the way that a non in-person fan, what their experience is with a game.
They have lots of technology development in terms of enhancing the viewing experience, along with your opportunity to make a bet before the game, a bet during the game, all these different things. Lastly, it's a little bit maybe backwards to say this, but it's actually the United States that's the emerging market here. As states are beginning to open up their sports betting opportunities, there's actually a considerable runway of growth in the United States.
Deidre Woollard: The amount of partnerships is pretty amazing. They've got 800 betting operators, 400 sports leagues and federations, 900 media partners, and I was surprised to find out that tennis is the Number 1 or Number 2 betting sport worldwide, which I found was really fascinating. NBA is Number 1 here in the States, but this just seems the scope here is massive.
David Meier: Yes, it is. Almost 80% of their revenue comes from outside of the United States, in probably a sport that not many people have seen. Cricket as an example.
Deidre Woollard: I want to go back to what you said about the changing the watching experience because I've started to notice this a little bit in things that I've been paying attention to. You start to see more probability and AI is being layered in here. It seems like this is really changing how we see the game. Is there a place for this? Maybe gets to be too much, how many stocks do we really need to see it? I know why they're doing it so that we want to bet on every little thing, but is there a saturation point here?
David Meier: If there is, we haven't found it yet. Again, all these creative ways of taking the data, analyzing it, and turning it into a betting opportunity. There's still incredible demand for it. Where I think you probably have the most risk is actually the regulatory frameworks that each individual State is creating. What that might mean is, if a State legislature can't figure out how they want to regulate it, that could delay the opening of a State to accept sports betting. They could also right in where the taxation of the revenue might be too onerous and could prevent that as an opportunity for Sportsradar to get another revenue source. I don't think we've hit the betting experienced saturation point yet, but we'll find out because there's still plenty of demand out there.
Deidre Woollard: So did you fill out a bracket this year?
David Meier: I did. We have a little in family bracket. Did you?
Deidre Woollard: I haven't. It's probably too late already.
David Meier: I think the first game started at one.
Deidre Woollard: Thank you for your time today, David.
David Meier: Thank you. Deidre.
Deidre Woollard: We talked about a lot of stocks on the show, but it's just a peek at the Motley Fool's investing universe. This year we're rolling out a new offering. It's called Epic Bundle. The service includes seven stock recommendations every month, model portfolios and stock rankings, all based on your Investor type. We're offering Epic Bundle to Motley Fool Money listeners at a reduced rate, as a thanks for listening to the show.
For more information, head to fool.com/epic. We'll also include a link in the show notes for you. Yesterday we played the first part of my colleague Mary Long's conversation with Lauren Sherman, a fashion reporter for Puck. They discussed the incredible turnaround at Abercrombie and Fitch. Today they look at two other retailers seeking a turnaround and one that might be too big to succeed. Quick note, this conversation was recorded before GUESS reported its quarterly earnings.
Mary Long: Let's pivot to talk about some other fashion brands quickly that are maybe hoping for similar successes as Abercrombie's had recently. Guess? which, I was trying to think of a way to describe it, is it entry-level luxury type brand. In February, they acquired Rag & Bone or announced their intention to acquire Rag & Bone. Can you give us a peek behind the curtain of this deal, walk through, maybe why it makes sense for GUESS?
Lauren Sherman: What I had heard previous and I reported this, what I had heard a few months earlier was that GUESS was in the middle east trying to raise funds to do a take private, because Abercrombie's an exception, the stock market is not kind to retail stocks, especially the last few years. They were trying to go private and the pitch in the fundraising was that they were going to buy Rag & Bone, which has been owned by some private investors and a private equity fund for the last 10 years, is still pretty popular, but is heavy on denim and it's interesting.
Obviously the through line with all these brands is that their success and their failures both come from being mostly denim brands and so Rag & Bone still a go-to for a lot of men, but it's not as relevant as it once was and also they're really relying on the off-price market. They needed to be sold, the private equity firm that own them wanted to get out of the deal and was being patient but was ready. They've entered this potential deal, I don't think it's closed yet, I assume that they'll do an announcement when it is.
But to be bought partially by GUESS, partially in this split between GUESS and this licensing firm. I think the idea with GUESS, it's still family run by the Marciano and Nico, the son is up and coming, he wants to do really interesting things, they're based in Los Angeles. They're deep in the art world. They've had some issues with the senior, the elder Marciano with some me-too stuff, some legal stuff so going private makes a lot of sense for them. This new young Marciano is, it seems to be really excited and wants to do interesting new things. The idea of buying Rag & Bone, I find it interesting from the GUESS perspective, because GUESS has a very strong aesthetic and a very strong DNA.
They're the opposite of what Abercrombie is doing. You look at the billboards on Sunset or on Los Angelican, LA and they look like they could have been shot 30 years ago. In a way, it's interesting, it doesn't feel super dated, it feels dated, but it's also charming and a cool black and white sexy way. You'll also see that GUESS has been distributed in bigger retailers like Essence and these luxury brands, to give it, like you're saying, this fashion luxury adjacent feeling.
Rag & Bone is similar, that it sells in all the luxury stores, it's not crazy expensive, it's not cheap, but it is what they call contemporary price and so they are almost the more standard preppy go-to, that Abercrombie no longer is. Does it make sense for GUESS to buy Rag & Bone? I would say that, if what they're trying to do is build a little portfolio of great denim brands that have a loyal customer, then sure. Also, they got a good deal on it. At one point it was valued at $250 million and I think they paid. Their part of the payment was only 39 million or something like that. It was it was pretty low.
They've got a good deal on it, and if they are going to go private and buildup this denim portfolio, it's interesting and you have to also remember the denim business is really based on supply chain and having those relationships. If you have relationships with the manufacturers or you own the factories, a lot of this stuff happens in LA actually, but also in Turkey and Mexico. There are some in North Carolina, some really big hubs for denim making. If you have really great relationships on the supply chain and you're able to get good deals, you can have a great business, his denim is one of the few things that people are willing to buy, not on sale, and so the margins are pretty good, especially compared to other types of clothing.
Mary Long: Gap is another retailer, it hasn't had a pretty past few years, I guess.
Lauren Sherman: Past 20 years.
Mary Long: When we were talking about Abercrombie, the focus of the story seems to be Fran Horowitz and what she's done to focus on product and turn around the brand. Gap's had a lot of people coming in and out the door as CEO. Now they've got Richard Dickson. He stepped into the spot this past summer. I believe you had Art Peck Helming the retailer from 2015-2019. Sonia Syngal was ousted after two-and-a-half years.
Lauren Sherman: Sonia.
Mary Long: That feels like a lot of turnover to me. Can you give us a peek behind the curtain of the corporate machinations that are going on there? Why are people leaving the job? What are the key issues that this retailer is facing?
Lauren Sherman: It goes back to Mickey Drexler, the merchant prince, the king of the mall. Mickey was the CEO of Gap in the '80s and '90s and made Gap what it is today as we know it. Prior to the '80s, Gap sold Levi's. They didn't sell their own products. If Abercrombie was the heritage preppy, Gap was the new American and it totally changed the way people dressed, the rise of casual Fridays, all of that stuff. When Mickey was fired in the early 2000s after a couple of bad quarters, he obviously went on to J.Crew where he revitalized that brand and it killed Gap for about 10 years and then had its own problems.
But when Mickey left the family that owns Gap or now owns part of it, it's a public company as the Fisher family, they really just never figured it out. They never were able to regain the magic. I'd say it was such an important iconic brand more than any of these other brands because it's spanned generations. It was so important to my parents, me, and also my little sister or whatever. It was a mono-brand for a mono-culture, and so people feel really emotional about Gap in a way they don't with other brands. In the mid-2000s, they brought in this guy who was a big cost cutter then they brought in Art who came from management consulting and I think tried really hard to fix it, but was getting pummeled by fast fashion and didn't know how to price things and didn't know what the consumer really wanted.
Then Sonia. She was life on there but came from more of the tech and supply chain side and probably didn't get brand. The other thing is they just have all these, it's in San Francisco, they have their executive lineup are people who've worked there, many of them since Mickey was the CEO, which is well over 20 years ago now. It is one of these stories and the Fisher family, they're good people, they care about it, but none of them really ever wanted to be running it and so they dip in and dip out and they're involved but they didn't want it the way that Don and Doris, the Founders did. It's been one of these sad situations of the past 20 years of just back-and-forth.
When is it going to come back? When are we going to get our Gap back? When are we going to get our mellow yellow commercial back from 1998 or whatever? I would say, with Richard Dickson, they hired this guy for Mattel, who got a lot of credit for the Barbie phenomenon. I would say that it should not all be given to him. He's a great executor and he has great relationships, but a non-crits who became the CEO, Mattel a few years ago. He is really the driver of that in partnership with Warner Brothers. Richard got a lot of credit for what happened with Barbie and I would say he deserved probably a quarter of it, but he was already on the board of Gap and he had been observing Gap for the last year before he was appointed CEO.
I think it was a brilliant choice. He is driven, he wants to change things and he is not stuck on the past. That being said, Gap Inc. is a large business that includes Old Navy, which is the first or second largest apparel-only retailer in the US. There is Banana Republic, which has been a struggle since they bought it in the early '80s. They've never really managed to figure it out. For a while, Mickey was able to do some stuff within the 190s, but it's been a sort of albatross. They also own Athleta, which is a very good active-wear brand with good product that has faltered in the last few years. Then they've owned other weird things.
They sold Intermix, a multi-brand retailer. It's not just the Gap brand they're dealing with. It's all this other stuff and so far I've been really interested in what Richard has done. The idea when you talked to executives to work there, they really thought he would have fired more people at this point but instead, the athletic team is still pretty new. The Old Navy team is still pretty new. Instead, he's trying to get them on track and let them revitalize these brands. He made this crazy move a couple of months ago where he hired the runway and red carpet designer Zac Posen to be the Chief Creative Officer of all the brands, Old Navy.
Then also to essentially be a creative advisor to him on the Gap Inc. portfolio. A lot of the headlines have essentially said that Zac is designing Gap, but which is not exactly true. I think you will see them bring in someone else, maybe not a big name, but someone to overhaul the Gap brand itself. But one of these things with Gap is it just feels too big to succeed. You say too big to fail. It's just so big and they tried to spin off Old Navy at one point. Maybe they'll try that again. It doesn't really make sense. You're never going to be able to really fix Gap and Banana Republic and Athleta if you have this giant seven billion dollar business that you have to reckon with that matters so much. But I would say early on I've heard some stuff about Zac's feedback to the Old Navy team.
He did indeed, this as a really New York guy who really made almost haute couture-level stuff. He's there, he's living in San Francisco. He's involved. He did come to LA and made the rounds Oscar's weekend. I saw him at a Georgia Armani party and then also he went to the Vanity Fair parties. He still wants to be in the spotlight, but he's really there every single day and it's going to make some changes. All that being said, again, I just think if Gap Inc. owns Old Navy, it's just really hard to fix Gap and Banana Republic because you have to put the focus on fixing Old Navy because that's where most sales and profits come from.
It's not an easy task, but I do give the board credit for hiring Richard and not one of their lifers because that's what they've been doing for many years or a management consultant or something. They hired an executive with real experience and has seen success in his career so let's see what happens. Unfortunately or fortunately, I don't think he is going to play the Abercrombie playbook with Gap, which maybe he should. Just seeing it, I know that he has been advised to do so and I don't think he will. We'll see. Can he give Gap magic? I don't know.
Mary Long: 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.
