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High-End Retailers Lululemon, RH, Deliver the Goods

Chris Hill, The Motley Fool

Even in the current low-unemployment, low-inflation U.S. economy, prosperity isn't evenly distributed. But if you're part of the demographic that's comfortable spending $100 on yoga pants, or the smaller population of people ready to shell out $5,000-plus on a new dining room table, well, clearly you've been out shopping lately. Apparel retailer lululemon athletica (NASDAQ: LULU) and furniture purveyor RH (NYSE: RH) -- the former Restoration Hardware -- both delivered upbeat quarterly reports after the bell Wednesday. Business is good.

In this MarketFoolery podcast, host Chris Hill and MFAM Funds' Bill Barker discuss Lululemon's ongoing success, its brand management, and its growth plans, but they also offer up some caveats to investors. For RH, they'll consider the way macroeconomic conditions have shifted from a drag on the company at the end of last year to a tailwind now. But the Fools will conclude this episode on a "what were they thinking?" note. Back in February, regional banks SunTrust (NYSE: STI) and BB&T (NYSE: BBT) announced they were merging in a deal that would create a new top 10 U.S. bank, and Chris at the time hoped that management would make a smart decision when it came to rebranding the combined company. Spoiler alert: They didn't.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on June 13, 2019.

Chris Hill: It's Thursday, June 13. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Happy Thursday!

Bill Barker: Thank you!

Hill: Congratulations to all the St. Louis Blues fans out there on hoisting Lord Stanley's cup. Arguably the greatest trophy in professional sports, certainly in North America. Don't you think?

Barker: Certainly off the top of my head. The trophy itself has more going on with it, in its history and its legend and the stories about it. Whereas the Vince Lombardi Trophy, or whatever the World Series trophy is called, yeah, there's no legend there.

Hill: That's true. Also the fact that everybody gets to take it home for a couple of days. That's pretty great.

Barker: Well, that's where all the legends come from. That's where all the stories come from.

Hill: We're going to get to some retail earnings. We are absolutely going to get to the banking news of the day. Let's start with lululemon athletica. First quarter, I actually saw two different numbers on same-store sales. I saw up 14% and up 16%. We can just split the difference and say they were up double-digits. Lululemon also raised guidance. Shares up not tremendously on the day, maybe 1% or 2%. I think that's because they've had a good run of late.

Barker: Yeah, maintaining at or near an all-time high. And yeah, the numbers that they presented were even a little bit more confusing than that. Its comparable store sales up 6%. 8% on consistent dollar basis. That's making an adjustment for foreign exchange. But then, total comparable sales up 14%. That includes open stores. Total sales up 20%. That includes online. They're doing a lot of things right. The margins are improving, they're getting it right in the stores. That's very much an outlier for retail right now. They're also doing it right online, which is less of an outlier, but great to be doing both right. That's part of the reason why the margins are improving, which is making the bottom line that much stronger.

Hill: One of the things Seth Jayson and I talked about yesterday about Lululemon was the challenges, let's put it politely, that the company has had in the executive suite over the last few years. And yet they've done an effective job throughout, I would argue, the past decade or so, of moving the brand away from initially being associated with hundred-dollar yoga pants to being more of an athletic brand, a lifestyle brand. They've done a very effective job of growing the brand equity of Lululemon. You look at Calvin McDonald, the current CEO, and one of the comments he made was about their plan to, as you touched on, grow digital sales, to double that in the next five years; to do the same with men's sales; to really grow international in a big way. If they continue down this path, I don't see any reason to doubt that they can accomplish this.

Barker: Yes, although I think taking the recent strength of operations and the numbers and then projecting that forward is a danger with retail, particularly with fashion retail. Fashions come in and out. They're, I guess, in an area which is growing, athletic wear. I think they're in a good place. But there'll be a hiccup, or more than a hiccup, there will be a miss somewhere, as there have been in the past. Some of that may be attributable to previous management, which has thankfully departed. But they will not go on forever without having, as I say, either a hiccup or a miss or go off the rails in some fashion at some point.

Hill: Right. I'm not suggesting that it's going to be nothing but sunshine and rainbows for the next five years. I'm curious, though. You used the word "fashion" referring to their retail. Do you think of this as a fashion retailer? I actually think of Lululemon as essentially walking the fine line between fashion retail and full-on athletic retail like a Nike or an Under Armour. I think they've done an effective job of splitting the difference.

Barker: Nobody anywhere should rely upon me for opinions about fashion. That said, as you know, and I've disclosed before, I am the reigning worst-dressed man in North America, and I've retained that for really an impressive period of time. I saw a tweet today to an article, something to the effect of, what the covers and the coverage of women's athletic magazines are. And it was a picture of Billie Jean King from back in the 70s, obviously drawing attention to her competitive abilities and the fact that she was an athlete competing against other athletes. If you were to look at the comparable magazines today, it would be about yoga, and things which are lifestyle, and things which are exercise, but are not competition. I'm certainly not qualified to say whether that's true across the entirety of women's sports and athletic coverage. But, where does Lululemon fall in that? Where do you place it? I don't think of suiting up in Lululemon to go out and compete, which I do think about with Under Armour or Nike.

Hill: I agree with that, although clearly Lululemon makes stuff that is for exercise. Maybe it's social exercise, with yoga or something like that. But no, I think they've done a very effective job of not just growing the company, but really growing the brand. I think the fact that they walk that fine line between fashion and athletic apparel is a credit to them.

Barker: Yoga is not something which is widely recognized as having competitions, although, did you listen to the ESPN 30 For 30 podcast? You ever listen to that?

Hill: Not recently, no.

Barker: They had a season on the hot yoga guy whose name eludes me.

Hill: I've heard of hot yoga, I didn't realize there was a guy who gets credit for starting hot yoga.

Barker: And trying to patent it or something. I'm spacing on his name at the moment. But he had claimed, for years, to have been the Indian yoga champion from many years back, back in the day, when you could make claims and not have them checked, and that check then publicized all around Twitter and Facebook and everywhere else, where information becomes immediate. It wasn't until a certain period of time where there was some international yoga champion, and he was claiming to be it before the inauguration of this event. But you can, I guess, compete in yoga. You. You can. This is what I'm saying. There's still time for you to start competing in yoga. Lululemon can help you out with that.

Hill: My flexibility is so limited, I have trouble tying my shoes. I'm not going to be competing in yoga. But look, it's just a matter of time before this is an exhibition sport in the 2028, 2032 Summer Olympics.

Barker: Let me sell you on something. You're a well-known, internationally, competitive runner.

Hill: Yes, absolutely. [laughs]

Barker: [laughs] Are you going to get better over time from here?

Hill: Probably not. I mean... where are you going with this? I have other stories to get to.

Barker: In yoga, which, you currently are so bad that you can't tie your shoes, you will get better as you take it up and start competing. Whereas running, which you love and are well known for, you may have peaked. I don't know. I'm not accusing you of having peaked. In your last marathon, for instance, you didn't wind up hospitalized.

So, you seem, to me, from the outside, to be getting better. But there will come a point where you will say, "You know what, I'm never going to beat the best time I ever had." Whereas I think that your ability to get better at shoe-tying and other things that might come out of your increased yoga use are in front of you.

Hill: You know what? When that day comes, I'm going to be shopping at Lululemon because I know they can actually provide good apparel. Let's move on to RH, which is better known as Restoration Hardware. First quarter, they needed this quarter. Restoration Hardware put up some strong profits. They raised guidance for the full fiscal year. The stock is up 21%. And as they said, they needed it, because even with this rise today, it's still down year to date, and really over the past 12 months.

Barker: They are correlated -- I may come back and address whether they're better known as Restoration Hardware, and why they got away from that name to go to RH. I think that naming has a thread through today's episode of all these stories. In disclosing their last quarterly report and lowering guidance for the year, RH was affected, seemingly, because of the highly discretionary nature of purchasing anything at Restoration Hardware, which is not competing on price. To be affected by, if not the economy, the stock market going into the fourth quarter, when the stock market last year was very weak. That would have affected their biggest quarter. They were projecting ahead and seeing discretionary spending for their end, of the furniture, under attack. And it's been a better quarter since three months ago. They've had a better quarter in their results. Now they're able to project ahead. We'll see, if the market goes down 15%, whether they're making another adjustment. Not that that's the only element of what affects the upper middle class or upper class, the people who are most likely to be shopping at Restoration Hardware. But the market does affect, at least in the short-term, some discretionary spend.

Hill: But one of the things we've talked about on this show, and has been covered ad nauseam across financial media, is the ripple effect of tariffs. Part of the way RH was able to put up this good quarter is because, as they said, they selectively raised prices on different items because of the effect of tariffs. I looked at that and thought, yeah, you know why? Because they can. Because the people who are going in to buy an expensive sofa, if it's 8% more expensive because of tariffs, they're not going to bat an eye at that, because they're already shelling out a good amount of money. It's not to say that they can do it across the board. Clearly, they haven't, because they realize they can't do it across the board. But I think they have pricing power. At least in this one quarter, they showed that they know how to use it smartly.

Barker: Well, they have it. What that in part depends on is the other end of the equation, the people having the money to spend. Another thing that has helped them recently is the decline in interest rates. You've got a lot of purchasing being made in conjunction with people moving. House sales are going to do better in a low interest rate environment. We've been in a generally low interest rate environment, but we had interest rates going up, mortgage rates going up, going into the end of last year or some of the early months this year. Now things have come down. You're seeing this, of course, in refinancing. The numbers in the most recent couple of weeks being very good. If people have more money to spend on fixing up their houses and furnishing their houses because they are spending less money on their mortgage, that's all the good for RH and other companies in the space. But remember that when interest rates go back up, as they someday will, that will come at the expense of some of the discretionary spend around housing.

Hill: Let's go back to Lululemon for a second. We've got Lululemon shares that are, as you said, hovering around an all-time high. We have RH, which is up big today, but still down more than 15% or so from its 52-week high, even with this rise that we're seeing today. Does one of these look more attractive to you than the other?

Barker: I would say that strictly based on valuation, I'd be more confident in Lululemon's ability to compound the growth of the company. That is fully priced in, I would say, with the price of the stock. RH, which is up $20 today, is still about 30% off of its high back in August of last year. In a good economy, they've got more room to grow. I think it depends on what you're betting on with interest rates. If you can tell me where interest rates are going, I can answer you that question correctly. Tell me which way interest rates are going!

Hill: Alas, I cannot do that.

Barker: I think that Lululemon, where it is right now, higher floor, lower ceiling. From today's price point, I think RH, more variable. There's a higher high if a couple things go right for it. The things that can go right for Lululemon are going right, have been going right. They're getting credit for that, as they deserve to. But how much more can go right is going to take time, whereas you see today, 20% up, RH is a little bit better than we were expecting, pointing to a better year ahead, and they're making up a lot of the ground that they lost.

Hill: Earlier this year, SunTrust and BB&T announced a $66 billion merger, the largest bank deal in a decade, creating the sixth largest bank. When it was announced, shares of both were up. They were popping the champagne on Wall Street. I went back and listened to the episode that Bill Mann and I did in early February when this deal was announced. And the last thing I said on that topic was, when it came to the resulting name, because this is essentially a merger of equals, SunTrust and BB&T. And the last thing I said was, "It's going to be interesting to see what they come up with for a name. Hopefully they will do no harm."

Cut to yesterday afternoon, when the company announced not just to all of us, but also to all of its employees, that the new name of the bank is Truist. Let's just let that sink in for a moment. SunTrust, BB&T, two well-known regional banks, got their branding experts together and came up with Truist. And at the request of one of our listeners -- I'm not going to share this person's name -- I got an email yesterday from someone who works at one of these banks. This person wrote --

Barker: They're already battening down the hatches? [laughs]

Hill: I'm going to read you this email. "My bank just named itself Truist from SunTrust and BB&T. I'd love to know your thoughts on the name change. We simulcast the event across the East Coast and there was no applause because we actually thought it was a joke." So, there you go. There you go, SunTrust and BB&T. Your own employees didn't applaud because they, like lots of us, thought, "This can't possibly be the name they've come up with. Can it?" And, in fact, it is.

Barker: I think management's response is, "We put the 'I' in trust."

Hill: [laughs] Here's my thought: this is a worse name than Tronc. This is a dumber name than Tronc. Tribune Media came up with Tronc, and at least they explained the logic of it. They said, "It's a digital world. The TR stands for Tribune, ONC stands for online content." Even if you hate the name, as I and everyone else did, you could at least see the logic. I fail to see the logic of this. The last thing I'll say from a business standpoint is, the branding people who came up with this just made everybody else's job at the bank harder. There are more than 55,000 people who work at this merged entity, and everyone else's job is harder because of the people who came up with Truist.

Barker: Never thought I'd see the day when you were in any way defending any aspect of Tronc and its name. So, they wanted, obviously, to keep trust. They're like, "We're looking through these names, and we've got trust. We love that."

Hill: Trust, part of SunTrust and BB&T -- Branch, Banking, & Trust.

Barker: Yeah. So, we've got to have that. How do we make it even better? When I heard this, it sounds like, to me, more than anything else, the druids.

Hill: Truist.

Barker: Truist. I'm thinking back to the Spinal Tap scene where they're introducing Stonehenge. "Stonehenge. No one knows who they were or what they were doing... the druids." So, they haven't announced their logo, but I think if they use Stonehenge, it'll be a winner, because everybody likes Spinal Tap.

Hill: There's a possibility there. Let me introduce another possibility, which is, take a page out of the playbook of the people at Tribune Media, who came up with Tronc, and tried to make it work, and realized they'd made a mistake, and said, "No, we're going back to Tribune Media." In the same way that Reed Hastings came out with Qwikster and very quickly, much more quickly than the people at Tribune Media reversed course on Tronc, he very quickly reversed course on Qwikster. There's still time! No one will care if they come out in a month and say, "You know what? We're actually just going with SunTrust." Or, "We're actually just going with BB&T because, among other things, we're going to save shareholder money because we won't have to do as much rebranding. We won't have to spend as much money on rebranding if we just stick with one of these two names."

Barker: One point of clarification. The only reason I do this is, I knew somebody at Tribune Media. It was actually Tribune Publishing that became Tronc. Tribune Media was a separate thing. It's a whole confusing alignment of what was going on over there. Once Tribune Media split off, maybe they knew that Tribune Publishing was going to go the Tronc route when they decided to get rid of it from Tribune Media. Now part of Sinclair.

Hill: Yes. I don't know if this man is one of the dozens of listeners. I doubt it. But I'm going to give a shout out to Nathan Arthur of Ohio. Nathan Arthur is the person on Twitter whose Twitter handle is @Truist. Nathan, get paid. Go to this bank. It's a $66 billion company. Go to them. You don't have to be greedy. You can just say to them, "Look, I'll pick a new Twitter handle. Give me $5,000, $10,000. Give me some money." Nathan, get paid, take that money, invest it. We'll hook you up with a year's worth of Stock Advisor for free, gratis. Just get paid by these people.

By the way, that's one more indication that the branding people who came up with this didn't know what they were doing. One of the first things you do, or certainly on the checklist, is, "Do we have the URL? Do we have the Twitter handle?" No! They didn't!

Barker: [laughs] Are you worried about your retirement at this point?

Hill: Me personally?

Barker: Yes. Your 401(k) account is at BB&T. Unless you don't participate in the company 401(k).

Hill: I do participate.

Barker: Well, then I'm educating you here. I'm giving you reason to fear for your retirement.

Hill: You know, the people who run our 401(k) are not in the marketing and branding business. I'm not concerned about them. They're not the ones who came up with this worse-than-Tronc name.

Barker: And yet, when you get your statements at some point in the future, you will have the Truist brand on them. That's where your retirement savings reside.

Hill: [sighs] I said it, I said back in February, just do no harm. Just do no harm!

Barker: "The druids." I think they've amused us. Not everybody does that with their name. Is RH doing that with their name?

Hill: We had a little bit of fun with RH, but as you pointed out --

Barker: That can only go so far. Lululemon, interesting story behind their name.

Hill: What is that?

Barker: The founder wanted a name that had a lot of Ls in it. Look it up. It's bizarre. It has no meaning other than he wanted a lot of Ls, which he thought would be interesting to the Japanese market. I won't try to explain it.

Hill: Well, there's no better way to end this podcast than by petering out.

Barker: By refusing to explain things I've raised!

Hill: Exactly. Bill Barker, thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interest in 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. That's going to do it for this edition of MarketFoolery. The show is mixed by the immortal Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you next week.

Bill Barker is an employee of Motley Fool Asset Management, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and Motley Fool Asset Management are not the views of The Motley Fool, LLC and should not be taken as such.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bill Barker has no position in any of the stocks mentioned. Chris Hill owns shares of Under Armour (A Shares) and Under Armour (C Shares). The Motley Fool owns shares of and recommends Facebook, Lululemon Athletica, Nike, Twitter, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends RH. The Motley Fool has a disclosure policy.