Old Navy: A Sort-of-Exciting Retail IPO
In today's MarketFoolery, Motley Fool Asset Management analyst Bill Barker talks with host Chris Hill about market moves, listener questions, the wonders of coffee, and more. Gap (NYSE: GPS) shares popped on the news that it'll spin off Old Navy. Probably a good move for both companies involved? Sure. Inspiring abundant confidence and enthusiasm? Not so much. Plus, the guys answer listener questions about shorting, say, the slowly dying beast that is Bed Bath & Beyond (NASDAQ: BBBY); rumors of a FedEx (NYSE: FDX) buyout from Amazon (NASDAQ: AMZN); and the Apropos of Nothing episodes, which are apparently not horrible to listen to. Hurrah! Tune in to find out more.
A full transcript follows the video.
More From The Motley Fool
This video was recorded on March 4, 2019.
Chris Hill: It's Monday, March 4th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, it's portfolio manager Bill Barker. Happy Monday!
Bill Barker: Thank you!
Hill: And happy birthday!
Barker: Thank you again!
Hill: To you and our colleague Bill Mann.
Barker: Yes. Why isn't he here, too?
Hill: Well, unlike you, he decided to take his birthday off.
Barker: I wanted to take my birthday off. It's a long story.
Hill: You're a game day player. That's why you're here. We're going to dip into the Fool mailbag. We have to start with a story that broke the end of last week when we were in Austin, Texas. When I say "we," I'm referring, of course, to me and our man behind the glass, Dan Boyd. You were here, presumably hard at work. That's about Gap. Shares of Gap are down a bit this morning, but on Friday, shares popped 20% when Gap announced that it is going to spin off Old Navy into a separate public company. Gap, Banana Republic, and Athleta are going to be a separate company, yet to be named.
You think this makes sense, both in terms of the spin-off and the reason that shares popped 20%. I'm assuming people said, "I'd like shares of Old Navy if it's a separate company, and I guess the way to get that is to buy shares of Gap today."
Barker: Yeah, I guess it makes sense in this respect: you've got Gap also announcing it's going to close 230 stores in the next two years. What do they do in that case right now? At times they're going to look at their other brands, including Athleta, Banana Republic, Old Navy, Intermix. "Can we slot one of these things in here? Will it do a little bit better than Gap?" Because Gap is heavily mall-based. So, at times, it may make sense for the company to put Old Navy into a place where it doesn't really want to be, if it were making its own decisions, but it's better than leading a second or third Gap in the same mall, which has occurred. So, making its own capital allocation decisions is good for Old Navy.
But the reason why it is potentially more valuable separate and apart aside from that is, the valuation for companies that look like Old Navy are higher, that are discount brands and are not locked into malls. There are Old Navy stores in malls, but they're not as weighted down by that as Gap is. So, you've got Old Navy joining a comp group where, at least according to one of the analyst reports that I read, they're putting a 2X higher multiple on Old Navy alone as on the remaining stores in the Gap umbrella.
Hill: That's pretty impressive. For a good stretch of time -- and you have to go back a ways for this -- the case for owning Gap was not just that it was a different time, there was a lot less online shopping. It was also that Gap had these three brands in Old Navy, Gap, and Banana Republic that appeal to different life stages. You've got Old Navy, which is much more geared toward kids; Gap, more toward older kids, young adult; and then Banana Republic was more for young professionals, and then presumably, young professionals, if they're having children, they're going back to Old Navy. It was this wonderful cycle.
But really, the story for this company for at least the last five years has been, quarter after quarter, "Well, Old Navy did well to make up for the rest of the business."
Barker: That's one of the stories. The other story is, "When is this thing finally going to grow again?" You can go back to 2004, and it was doing $15 billion, almost $16 billion in revenues. It's 2019, it's doing $16.5 billion in revenues. It has bounced up a little bit, down a little bit, but it's never had more in sales than $16.5 billion. It was at $15 billion 10 or 15 years ago. That's just not a growth story. It doesn't look like, when you take the whole package together, despite having added a couple of brands in Athleta and Intermix, that it's growing today. You've got the comps from the most recent quarterly report, Gap down 5%. No surprise there. That's not necessarily worse than what you're seeing from L Brands. Gymboree is going bankrupt. It's just, clothing in malls, not what you thought it was 10 years ago.
Hill: Does Old Navy as a stand-alone company interest you as an investor?
Barker: I don't know. I'd have to see the numbers. It's better positioned. I'd want to know how many stores are in malls. I'd want to know what management is projecting the growth as. I'd like to see the margins broken out. I don't know. It has to have more going for it than just, "We're not part of Gap now." Positive as that is.
Hill: Although it wouldn't be the worst tag line right out of the gate.
Barker: No. I was flashing back today after looking at this graph of the sales over the last 15 years, to the 2005 Spike Jones commercial.
Hill: You email this to me right before we started. I'll tweet this out on the MarketFoolery Twitter feed. I was unfamiliar with this, or, if I watched it in 2005, I don't remember it.
Barker: Well, you're getting old.
Hill: I am.
Barker: Unlike some of us. [laughs]
Hill: Well, today, my friend, you're getting older.
Barker: [laughs] Well, it got a lot of headlines at the time, because Spike Jones, great director of both commercials and music videos. You know some of his best work there.
Hill: Yeah, Christopher Walken.
Barker: Christopher Walken. You should tweet that one out, for people that don't know Christopher Walken's work with Fatboy Slim. You've got a whole bunch of tweets coming today.
Hill: I think I do, yeah.
Barker: You're promoting YouTube, basically, today. Anyway, the commercial, just to ruin it -- for anybody who desperately wants to watch it, spoiler alert -- they just trash the Gap store. It's about, "We're doing some remodeling." That's the news and the punchline. But it's done in an entertaining way. But I find it oddly prophetic. They've just been destroying the company for about 15 years now.
Hill; Yeah. It was meant to be, "Hey, customers and eventually employees in this commercial are just trashing this one Gap store." And eventually, it turns to the "pardon our dust, we're remodeling, a whole new Gap is coming." But as you said, really, it was just the beginning of the business being trashed.
Barker: I think they should have just had Christopher Walken dancing around the store. That would have been better. Looking back on it.
Hill: That could be something for Old Navy, for their new marketing campaign.
Barker: Exactly. It wouldn't be as weird as some of their old marketing campaigns.
Hill: That's true. Our email address is marketfoolery@fool.com. Question from Zach Turno, who asks, "With Amazon bringing more of its logistics operations in-house, how realistic are the rumors that FedEx is a potential acquisition target for the all-powerful Amazon?"
I was unaware that there were rumors that FedEx was going to be acquired by anyone, much less Amazon. I think Amazon is probably more interested in just building their own stuff out, rather than buying a chunk of FedEx.
Barker: Yeah. I think that with Amazon making more and more obvious moves into the logistics arena, it's not that I would call that realistic. Although, they're certainly not going to let me know ahead of time whether they're really interested. I think back to the rumors around XPO Logistics toward the end of 2017. There was a published rumor from a reasonably credible source that, at least the rumor was out there, that XPO was being targeted by Amazon in order to prevent Home Depot from acquiring XPO Logistics. This juiced the stock of XPO. Fast-forward a year later, and Amazon has just leveled XPO's stock by pulling two-thirds of its business from XPO right at and after the holiday season. It's not actually announced that that was Amazon, but XPO's No. 1 customer, which everybody believes could only be Amazon. That was a move away from using the logistics services of XPO.
Amazon is putting its packages in USPS, UPS, and FedEx. A huge chunk of its costs are using those services on the delivery side, so something ultimately is going to change or evolve. But I wouldn't bet money on shares of FedEx along the lines that Amazon's going to acquire it.
Hill: E-mail from Isaac Mellon in Wisconsin. Isaac writes, "I've never shorted a stock, nor do I have the confidence in my investing knowledge to go out there and do it. I know The Motley Fool is focused on the buying and holding of great companies for the long haul, and I adhere to that guiding principle as well. However, I feel like shorting stocks could be a useful skill when deployed selectively and carefully. Do you have any recommendations on how to analyze potential shorting opportunities? The only stock I ever considered shorting was Bed Bath & Beyond. When I look out five or 10 years, I don't really see a world where Bed Bath & Beyond is successful or maybe even around. However, the same thing could probably have been said about Best Buy several years back and look where they are now. I'd love any thoughts you might have on this topic and any stocks your analysts have considered shorting or have actually shorted. Thanks."
Great email for a couple of reasons. One, because I like that Isaac is thinking about shorting selectively and carefully. That's certainly how I view it. Like, Isaac I've never shorted a stock before. And I like that he found two relevant examples, both in the same industry. He's absolutely right. There was a point in time when there were people out there saying, "Man, Best Buy, that thing is doomed. That thing is going down." Hubert Joly came in, turned the company around. You probably took a bath if you shorted Best Buy at that point in time. Bed Bath & Beyond, that's another story.
Barker: That is another story. We've kicked in the teeth of Bed Bath & Beyond on a quarterly basis. Whenever I've been around look at their quarterly reports, they have been ones which would delight bears, delight people who are short, for the reasons that your listener/emailer has identified. Why is this thing still around? Do we need it? I think the theses for shorting a stock need to rely on a long-term trouble. There have been people who have successfully timed, "Oh, this company is good, but it's just way too expensive." And there have been people who have lost all their money on the same type of thing. As you will hear, the market can stay irrational longer than you can stay liquid when you're right about the long-term but wrong about what can happen with a stock.
Now, Bed Bath & Beyond is not going to double or triple or quadruple on you through investor enthusiasm, so I think that that's a much safer play. What they've been doing, buying back stock, closing down some stores, the same mall-based kind of story that we've just discussed. I like that as a thesis. I don't know where the stock is today. Lower than it has been in the past.
You've never shorted anything?
Hill: I've never shorted anything. I have done this long enough to know -- and this ties into something you just said -- that if I'm ever going to short a stock, it's not going to be a situation where I think my valuation skills are better and smarter than everyone else's. You're right, it really does seem like the people who get burned on shorting are the people who look at a stock at a high valuation and say, "This is just crazy. Why is there this enthusiasm?" To your point, Bed Bath & Beyond is a business that does not have a lot of enthusiasm around it. I think, all things being equal, for your first time shorting a stock, you're better off going with the proverbial "this is a troubled business within a challenged industry."
Barker: Yeah, and I'd want to see management that is taking unnecessary risks. With Bed Bath & Beyond, I don't have the data in front of me because my computer has died. Otherwise I would just pretend like I knew that kind of thing off the top of my head by reading something online.
But, what are the costs of shorting? Well, the dividends that you have to pay when the company pays them when you're short the stock. And, say Bed Bath & Beyond agrees, "Our future doesn't look so good. What we'll do is try to maximize the profits from today. We won't go out building new stores, getting into lots of long-term leases and malls. We'll just buy back our shares with the money they're making." They're still making profits there. "And, we'll pay a dividend." Well, then, if you're short the stock, you're going to be paying that dividend, and the stock price won't really be going down that much if the company is using its dying breaths to keep buying back shares.
Ultimately, if it's doomed, the stock will go to zero. But in the meantime, you may be paying a lot out in dividends from the short side.
Hill: Isaac concludes his email by writing, "Totally unrelated, I'm in medical school and we just finished up our gastrointestinal pathophysiology course. The attached slide was in one of our lectures. Since our professor did not cite the source, I can only assume he's been listening to MarketFoolery and learning about the science of coffee as a miracle beverage. Thank you for educating the masses."
He includes this slide. Frankly, it's a lot of medical stuff, which I guess when, you're in medical school, that's probably just as well.
Barker: Fair enough.
Hill: A lot of terms that frankly don't resonate with me. But basically, if I'm reading this correctly, and I like to think I am, one of the treatments of viral hepatitis? Coffee. There you go! Studies suggest coffee consumption is inversely related to liver enzyme cirrhosis, etc.
Well, as Isaac said, and he's in medical school -- you're not in medical school, I'm not in medical school. Here's Isaac, he's in medical school. And he used the term "miracle beverage."
Barker: Oh, yeah. As have others. Miracle is a long way to go, but how else can you explain all the things that coffee does?
Hill: Have you seen this coffee brand? The brand is Super Coffee. I've seen it in a grocery store nearby.
Barker: And yet, is not all coffee super?
Hill: Right, that was my thinking. I was like, that seems redundant, to call it Super Coffee.
Before we get to one last email, just want to say thanks to the dozens of listeners who came out to our listener meetup in Austin, Texas last week. Special thanks to Paul Hooper and Scott Killin, who each gave me a bottle. One of whiskey, one of barbecue sauce.
Barker: Math question.
Hill: Yes?
Barker: There are dozens of listeners total.
Hill: Yes.
Barker: Dozens showed up in Austin?
Hill: Yes.
Barker: All of them?
Hill: Well, there are dozens of listeners total. I can't give the exact number. I would say --
Barker: It's always divisible by 12. That's all you've ever really claimed.
Hill: Right. They travel in packs. I would say that what we had in Austin was -- that's the thing. People ask, "How many listeners?" And I say dozens. Really, the question is, "How many dozen?" In Austin at the meetup, two or three. Somewhere between two and three dozen.
Barker: No, it was either two or three.
Hill: It was either two or three, right. Thank you also to Julia, Ty, Charles, everybody else who came out. Thank you to Güero's Taco Bar, our favorite taco bar in Austin, Texas, for hosting us. Thank you also to Dr. Tim Vakris, the sports medicine doc who is my unofficial consultant on marathon training. He showed up. It was great to check in with him.
Barker: He's one for three.
Hill: He's one for one.
Barker: He's one for one. You're one for three.
Hill: I'm one for three, but here's the thing. Since I started consulting with Dr. Tim, one for one.
Barker: Marathons sans hospitalization.
Hill: Exactly.
Barker: It's hard to call it a streak yet, a streak of one.
Hill: Well, if I can make it again this fall, then yeah, it'll be a streak of two. And, a special shout-out to one of our members, Vinn Tron, whom I had a great chat with Friday evening at our reception. Vinn is in the process of looking to buy his first home and asked me for advice. I really didn't have any helpful advice.
Barker: Did you suggest Rocket Mortgage?
Hill: I did not.
Barker: Dozens of listeners might have expected you to. [laughs]
Hill: I just assumed. I just assumed he knew.
Barker: Isn't that the No. 1 mortgage provider?
Hill: Yeah. Final email from Sitara in Toronto, who writes, "I started listening to the show two years ago, but I've literally gone back and listened to every single episode of MarketFoolery and Motley Fool Money. I did, however, always skip your Apropos of Nothing episodes. But I fell behind recently on the podcast and was catching up while cleaning the house today. The latest December 1st Apropos of Nothing episode came on and I was in the middle of doing some planting around the house. Solely because I was too lazy to stop and wash the dirt off my hands in order to fast forward the episode, I ended up just listening through it."
Right there, that's just fantastic. Like, "God, I have to wash my hands." I love that out of laziness, that's why the listening took place.
"And it actually wasn't that bad." [laughs] Again, great. Among the backhanded compliments we've received..."it actually wasn't that bad." "You guys are pretty funny, especially as you drank more. It made me laugh out loud a few times. Also, I'm with you, Chris, on Miles Davis. Anyway, thank you for all you guys do on the show, both for the useful information and now for the completely useless information. Also, please let both Bills know that I never skip the episodes that they're on. Thanks and Fool on."
Thank you for that! Great note!
Barker: It hardly feels like a compliment that she doesn't skip the shows that I'm on because she says she literally listens to all of them. And yet, there be some who have listened to all except the ones I'm on.
Hill: Well, yes. Also, as you pointed out before we started taping, I like to warn people ahead of time. The few times that we've done the Apropos of Nothing episodes, I like to tell people right off the bat, "Look, this isn't the usual show. This has nothing to do with business or investing, so by all means, skip it." And people take our word on that one.
It might be time for a new one.
Barker: That could be a little motto or a little promo thing for Apropos of Nothing. "Actually not all that bad."
Hill: "Actually wasn't that bad."
Barker: "Actually wasn't that bad." You'd go so far as to promote yourself with words like that.
Hill: Sure! I think we'll do that.
Barker: I think it's accurate. [laughs] It's actually not all that bad.
Hill: Yeah, I think that's right.
Barker: We've never really claimed any more. I'm not sure we've ever even claimed that much. And yet, now we will. Actually, Apropos of Nothing? Not all that bad.
Hill: Not that bad.
Barker: Not that bad, actually. Doing another one?
Hill: At some point.
Barker: Someday?
Hill: We'll get there. You can read more from Bill Barker and his colleagues. Go to mfamfunds.com. Thanks for being here!
Barker: Thank you!
Hill: Happy birthday!
Barker: You know what? At MFAM, we're threatening to break the $1 billion mark for all of our funds and ETFs.
Hill: For a little thing we like to call AUM, assets under management?
Barker: Yeah, assets under management.
Hill: $1 billion?
Barker: Yeah.
Hill: You're going to join the Tres Commas Club.
Barker: Yes, that's right. [laughs] So, at some point, we'll put somebody on here to take a victory lap when that happens. It could, if the market would just do a little bit of work today. It could happen. But it's premature right now. You'll know when our sponsored party shows up in the office. You'll be the MC.
Hill: You just got to what was going to be my question -- is it safe to assume both that there, A, is not a party in your office to celebrate your birthday? And B, there will be a party to celebrate Tres Commas?
Barker: Tres Commas, you were saying throw a breakfast. Everybody likes breakfast.
Hill: Yeah, who doesn't like breakfast?
Barker: You may have the winning idea, although we're open to others.
Hill: OK. Thanks for being here!
Barker: Thank you!
Hill: As always, people on the program may have interests 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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Bill Barker owns shares of Home Depot. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, FedEx, and Twitter. The Motley Fool recommends Home Depot and XPO Logistics. The Motley Fool has a disclosure policy.
