After five years of restaurant and entertainment chain Dave & Buster's (NASDAQ: PLAY) consistently beating expectations, the company missed its consensus adjusted EPS forecast this time around by a penny. Shares tanked by more than 20%. Meanwhile, Wall Street barely reacted at all to the upbeat comments Elon Musk made at Tesla's (NASDAQ: TSLA) annual shareholders meeting.
In this MarketFoolery podcast, host Chris Hill and senior analyst Seth Jayson discuss the underlying issues for both of these companies, the risks they face, and the strengths they still bring to bear. They also reflect on the rise and fall of TheStreet, once an investing and business news powerhouse -- and something of a Motley Fool competitor. News broke Wednesday that the business co-founded by Jim Cramer is being sold for a mere $16.5 million -- less than 1% of the peak $1.7 billion market cap it hit shortly after it went public 20 years ago. And they preview the earnings release of lululemon atheletica (NASDAQ: LULU), one of the few consistently strong performers in the apparel game lately.
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 12, 2019.
Chris Hill: It's Wednesday, June 12. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Seth Jayson. Thanks for being here!
Seth Jayson: I'm in my full "don't run me over" colors, with my greasy, sweaty, guy-who-biked-in look. For those of you who can't see me, look for the video.
Hill: Yeah, this is when the people are like, "No, we're happy that it's an audio podcast. We're thrilled. We don't need to see you in the bright orange biking shirt."
Jayson: I don't even have a handsome voice, either.
Hill: Nah, you've a good voice.
Jayson: Nice speaking voice.
Hill: Let's move along. We've got a bunch of news. We're going to preview some earnings that are coming after the closing bell. Let's start with Dave & Buster's, though. First-quarter profits came in lower than expected. That's actually the first time in five years that's happened for them. Shares of Dave & Buster's are down more than 20% this morning. I know they lowered guidance. How much did they lower it? I mean, they didn't miss it by some enormous amount.
Jayson: It wasn't much. Full-year guidance, they missed by a penny or something. But people are freaking out. I think once you've set up the expectation that you're going to do better than people expect all the time, then the minute you don't, all heck breaks loose. I own a stock that's done 50% or something. It's a very clever tech company. If you really want to know how to lose money, come to me. Twenty percent in a day, a week? Nothing!
Dave & Buster's is one of those businesses to me where it seems odd it still exists. You have so much restaurant competition. You want game and food? How is everybody not at home getting DoorDash food delivered while they play Apex Legends on their Xbox?
Hill: Can I answer that? You don't always want six of your friends coming over to do that. Sometimes you just want to get out of the house.
Jayson: I suppose. The comp, slightly negative to flat, suggests that people aren't all that excited, at least in the last quarter or so. They've been getting a little growth over the years by opening new locations. The margins have been creeping downward for several years now. This is not my idea of a super awesome opportunity. Free cash flow isn't really there. Unfortunately, sitting there at a price-to-earnings ratio of 17 sounds like a bargain today, but I think it might need to be more of a bargain before it's a real deal.
Hill: I'm glad you mentioned the comps. That was one of the things that leapt out at me when I was looking at this quarter -- their comps really aren't that great. For those who are new to this podcast or new to investing, when we talk about comps, same-store sales, by definition, those are locations that have been open for at least a year. The new locations, this is one of those things that's maybe not a red flag, but maybe it's a pink flag, not just for Dave & Buster's, but for any, whether it's a grocery store, just a basic retail operation, or in this case, Dave & Buster's. It's a little bit of a pink flag where you go, "Wait." The new locations, there's the initial excitement, Dave & Buster's has opened up in your town or your city or whatever. It's like, "Oh, let's go there!" But if they can't sustain those people...I'm wondering how much of the gross margins creeping down has to do with an increased marketing spend? Because it does seem like they are doing a lot of promotional stuff.
Jayson: All the margins are on the way down. Their food prices were going up for a while and then we had labor and other costs going up. A lot of restaurants are experiencing that. It's just plain old competition, you have to match prices in some way or another way to bring people in the door. One of the challenges I would guess exists for Dave & Buster's is, it's a super small location without much stuff in it, right? I mean, no, it's not. It's a place where you play stuff. It's not like cranking out another one of those Chipotles with the wrought iron furniture made out of black pipe from the plumbing store. It probably costs a little more money to build these locations. If they're not paying back so quickly, your financials start to head the other way.
Hill: I think on the plus side, over the next couple of years, Dave & Buster's, to the extent that they're looking to open up new locations, will probably have more options as commercial real estate continues to face some challenges. On the flip side, whenever the conversation turns to, "Well, we think a recession is coming in the next year or two," when I think about stocks that are recession-proof, Dave & Buster's is at the other end of the spectrum. This is a business that's done well for a bunch of years, but it seems like one of the ultimate discretionary income stocks.
Jayson: Yeah. I guess we'll find out someday, although predicting recessions has been a bad business to be in for a little while.
Hill: [laughs] Yes, it has. So, the fact that the stock is at a 2.5-year low, you're not looking at this saying, "Yeah, buy on this dip"?
Jayson: No. I have a long history with "value stocks" like this that continue becoming more and more of a value but less and less of a value, if you know what I mean.
Hill: Tesla had its annual shareholder meeting on Tuesday. Shares were up briefly this morning in part because Elon Musk made comments at the meeting --
Jayson: Did he say anything positive? I can hardly imagine!
Hill: Let's be clear, any CEO who's not saying positive things at their shareholder meeting is doing a bad job of being the CEO. I don't knock him for that. He said, among other things, it won't be long before we have a 400-mile range car. Talked about, in 2020, Tesla drivers will be able to use self-driving features without intervention. It seems like, you just look at the stock chart today, there was some initial enthusiasm. The stock was up briefly. It's now down a couple percentage points.
Jayson: The problem is, if you say things that don't turn out to be true often enough, sometimes people stop believing you. It was more than two years ago that Elon Musk promised us that you'd be able to sleep in your Tesla while it drove across the country, and everyone believed it then. That never happened. And then he kind of dials things back. And then a couple months ago, he dialed things up. He said, for sure there will be a million Tesla robo-taxis on the road; you'd be stupid to buy any other car. Which is just laughable. I mean, Consumer Reports a couple of weeks later rated Autopilot as dangerous, and more difficult to drive with than just driving yourself, because it was so erratic. And now we have, a couple months after that, Autonomy Day, which to me seemed like a smokescreen designed entirely to try to shift the sentiment of the company away from financials and toward, "We're going to become an Uber competitor!" Now he's sort of walking things back and saying self-driving without user intervention, but also at the same time supervised robo-taxi -- which, by the way, Waymo is doing that right now, and it exists in other forms.
He just makes these promises that don't line up with the reality of what other self-driving car leaders are saying and what they're doing. This is a really difficult task. It's not just a matter of getting a couple hundred thousand or a couple million more miles. There's real diminishing returns for machine learning for doing this. They have not cracked this nut yet. Tesla's doing it with more limited hardware than other companies. There's nobody else trying to do it their way. Tesla true believers would say, "Well, that just shows what a genius Musk is." I tend to think that if he's the only one doing it this way, and all these other really smart people are saying, "You probably can't do it that way," that he's probably the one who has it wrong.
Very interesting shareholder meeting. There were some other comments that stood out to me. Tesla shareholders are obsessed with the idea of being victims. They love this idea that they're victims of a media conspiracy, which is hilarious because they are the beneficiaries of so much media incredulity for years. I mean, nobody looked at Musk and said, "Can you really do all those things?" until recently. Now, of course, they don't like it. One of the remarks was something about, "It's crazy, the media talks about you as if you're about to go bankrupt!" And he says, "Of course we're not. That's just insane." Except, not too long ago, everyone thought they were running out of cash, and Musk claimed they weren't, and then after they had a quarter where they got some free cash flow, he came out and said, "Yeah, we were only a couple weeks away from running out of cash." They want to have it both ways. It's really nutty.
I wouldn't take a real position in it either way. On the one hand, you have a CEO who's very comfortable saying things that are not true. You have a lot of other executives leaving the company, probably related to that. On the other hand, you have this rabid shareholder fanbase that makes the stock completely detached from fundamentals. It's all about this crazy personality. Not for me.
Hill: You just reminded me of the Alex Gibney documentary that was on HBO. For those who haven't seen it, it's a fabulous bit of documentary filmmaking, about Theranos and Elizabeth Holmes. One of the things that was noteworthy to me in that was the opening of the documentary. There was a decent bit of information about Thomas Edison, tracing the line of the Silicon Valley "fake it 'til you make it" mentality back to Thomas Edison; saying Edison did a fair amount of that. That's a tried-and-true practice that didn't start with Elizabeth Holmes, it didn't start with Elon Musk. That kind of thing goes on.
All that being said, they report earnings, second-quarter report is scheduled to come at the end of July. It really seems like, on the times when Tesla has come out with a legitimately encouraging/great earnings report, a lot of that other stuff just disappears. By the way, I'm like you -- I don't own shares, I would never in a million years short this stock. I'm on the sidelines, just watching all of this play out. And I just think to myself, no one ever got in trouble for walking up to a bat and hitting a home run. If they come out at the end of July and have some blowout quarter, that helps. But, of course, they actually have to do it.
Jayson: Yeah. The miracle quarter, and it wasn't really spoken about at the time, the cash flow quarter, was an artifact of really massaging working capital and calling in some favors. You wonder, can they actually keep doing that? They raised money following the miracle quarter because they needed it, which suggests that they couldn't keep doing that. It's not easy to build cars. It's not easy to build cars when you're also telling everyone you're going to build self-driving electric trucks and all this other stuff. Maybe they pull it off. I really hope the industry goes, but they have a lot more competition coming from all the other manufacturers, and those manufacturers are not stupid.
Hill: We do not usually cover micro-caps on this show, but we're going to make an exception today quickly because history demands it. This morning, news broke that thestreet.com has been acquired by TheMaven, which is a business I was unfamiliar with until this morning.
Jayson: Is TheMaven a penny stock promotion company? It sounds like it could be.
Hill: I don't know. It's an umbrella company. It has a bunch of media brands underneath it, including Ski Magazine and Yoga --
Jayson: Oh, so it's not a penny stock promotion company. Okay.
Hill: I don't think so. Anyway, TheMaven has acquired thestreet.com. For those of us who are, for lack of a better word, old, quick history on thestreet.com, which was started by a couple of people, one of whom was Jim Cramer, back in the 1990s. If you've ever watched CNBC, you probably run across Jim Cramer. thestreet.com has been synonymous with Cramer, who stayed active in that business throughout. It was 20 years ago last month that thestreet.com went public, and I believe it was within the first week, the valuation of the company was $1.7 billion.
Jayson: What'd TheMaven pay?
Hill: TheMaven paid $16.5 million.
Jayson: That's it?
Jayson: That's all? I would have thought they were worth maybe close to $100 million or something.
Hill: As I told a couple of people this morning when this news broke, you go back 20 years, it is hard to overstate how much The Motley Fool and thestreet.com were direct competitors; how much heat there was on The Motley Fool, and in particular on Tom and David Gardner, for not going public. People in the media writing, and other people saying, "You guys blew it. TheStreet went public."
Jayson: We ain't selling the company for $16 million next week, I'll tell you that.
Hill: Yeah, and here we are. It's both noteworthy, and, I have to say, just a little bit odd to watch, this is how the public life of thestreet.com has ended. It's a little bizarre to me.
Jayson: You'd have to offer a lot of $16 millions to have anybody sell this company.
Hill: Before we wrap up, I mentioned, Lululemon Athletica is reporting after the closing bell.
Jayson: The only apparel/retailer that isn't on the crap list these days, right? Near an all-time high.
Hill: Yeah. It's worth recalling that five years ago or so, when Nike and Under Armour both started looking at what Lululemon was doing with athleisure --
Jayson: And Gap. Everybody.
Hill: -- and looking at, "Well, they're making and selling yoga pants for $100. We can make quality yoga pants and sell them for $75, $60." There were people who looked at Lululemon and thought, "Well, it's been a nice run, but now you're probably in trouble." And they've basically just kept on trucking.
Jayson: Which is odd. I came into it about that time. Earlier in Lululemon's history, I thought, this can't go on. By that time, I thought it could. It was really clear that the brand was really strong, and they were doing things a little bit differently. I came into it with Hidden Gems and then personal money, around the time of the see-through-pants-gate, and the nutty founder telling women that they were basically too fat to wear Lululemon, and then wondering why everybody was upset. [laughs] They've just done a great job.
Now, oddly, for having been run by somebody who seemed like a marginal personality to me, and then replaced by a guy who was ushered out with very little public comment in the middle of the #MeToo headlines, it appeared that something similar may have happened, but we never really found out what. The company, over the last couple of years, there were long periods of time where it was running, you might say, on autopilot, but where the executive team, not the top-level execs, but the...I don't want to call them second string, but the next layer down, did an amazing job of keeping this company moving forward, and not just keeping it going, but batting it out of the park. They've done great.
Now, tomorrow, supposedly, if I've read the charts correctly, or the tables, they're supposed to earn $0.70 on $756 million worth of revenue for the quarter. That's not even the big quarter. The company trades at about 6 times revenue, 48 times earnings. But this is a company that has seen margins increase, really healthy margin increases, for years. It's like a 16% free cash flow margin recently, something like 15% net margins trailing 12 months. Those are incredible results, especially at a time when every other apparel company is stinking it up. No doubt I've doomed it now, since I own it and I praised it so highly.
Hill: [laughs] Two of the things I'm going to be watching for in the quarter are, what are they doing internationally, and how are they growing the men's segment? We say all the time, yes, what Wall Street analysts write and say and how they measure, yes, that is one data point. But we prefer to look at, what is the company saying? What standards, what goals is the company setting for itself? Those are two things that Lululemon has identified as a big priority for them. And so far, they've done a decent job growing both those segments.
Jayson: Again, I wondered, while I owned it, "Can you really sell something called Lululemon to dudes? Have you met dudes?"
Hill: Yes, you can.
Jayson: They're terrible. But apparently, there's a certain number of them with a bunch of money, a larger number than I ever would have thought, who are just happy wearing their Lulu stuff. Andy Cross has that Lululemon stuff. He's our boss. And then, yeah, internationally, doing pretty well too. We'll see tomorrow. Trading near an all-time high. If it continues to go up from here, you'll hear me going whoo-hoo wherever you are.
Hill: If anyone takes the LinkedIn promotion and actually sends $50 to you, you could do that and maybe get something to cover up the bright orange shirt you're wearing. [laughs]
Jayson: I'm so the opposite of Lululemon. I literally bought a bunch of bright yellow wicking shirts from this terrible company in Arkansas or something because they were cheap. Actually, the quality was decent, but they were $2.60 each. And I'm not kidding you, when they showed up at my house, the box was busted open. I had to count everything. And there were footprints on the shirts. [laughs] This is the direction I go. I got more than a dozen shirts for $70, the cost of one shirt at Lululemon.
Hill: I was going to say, the flip side is, people aren't walking all over the shirts at Lululemon. If you buy a shirt and it costs basically the equivalent of a cup of coffee, then yeah, the trade-off there is, you can't complain when there are footprints --
Jayson: Oh, I wasn't. I looked at it and I said, "What do you think you're getting for $2.50, dude?"
Hill: Fair enough. Seth Jayson, always good talking to you. 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. 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.
Chris Hill owns shares of UAA and UA. Seth Jayson owns shares of CMG, Lululemon Athletica, UAA, and UA. The Motley Fool owns shares of and recommends CMG, Lululemon Athletica, NKE, Tesla, UAA, and UA. The Motley Fool recommends Dave & Buster's Entertainment and UBER. The Motley Fool has a disclosure policy.