The retail sector continues to be a challenging place to make a profit, and among Wednesday's more interesting earnings reports were three that reflected that fact. Outerwear specialist Canada Goose (NYSE: GOOS) came in with weaker-than-expected revenue, and its forecast for "materially larger losses" in its current quarter sounded disturbing. Upscale apparel seller Abercrombie & Fitch (NYSE: ANF) delivered weak comps, and -- perhaps more concerning -- said it was closing three of its flagship stores. And while Dick's Sporting Goods (NYSE: DKS) beat on revenue and earnings, the targets it topped were hardly ambitious.
In this MarketFoolery podcast, host Chris Hill and senior analyst Seth Jayson zoom out and consider the bigger picture for these companies, the environment in the retail and apparel segment, the investment theses for the stocks, and more.
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 May 29, 2019.
Chris Hill: It's Wednesday, May 29. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, Seth Jayson in the house. Thanks for being here!
Seth Jayson: You're welcome!
Hill: If yesterday was all about payment technology, and it was, today is all about retail. We've got "earnings," and I'm putting earnings in air quotes because there's a lot of red out there today. Let's start with Canada Goose, which is the maker of outerwear.
Jayson: Expensive jackets. I own this one. The stock just got cheaper.
Hill: The stock just got cheaper.
Jayson: Thanks a lot, Canada!
Hill: [laughs] Let me just say to anyone listening, please ignore any headlines you see about Canada Goose, fourth-quarter adjusted profits being higher than expected, because none of that matters. Revenue was weak, and the company said it expects, and now I'm quoting, "materially larger losses in the current quarter."
Jayson: That's actually not really very shocking. I wouldn't call revenue weak. It was still pretty good growth. The problem here is they're always surpassing estimates, and they missed the estimates by a whopping $800,000. The stock is down 25%, or close to it right now. That's a bit of an overreaction, but it's understandable. Revenue was up 25%. And that's in Canadian dollars. I can't remember how Canadian dollars compare to real dollars these days. But we'll do things in Canadian dollars since that's what I have in front of me. This was the slowest revenue growth in several quarters, but this is not really that crazy. They sell expensive jackets. You can't grow 40% every quarter forever. You get a bigger base, and that growth becomes harder to achieve.
Now, the material larger losses in adjusted operating earnings and net income are also really not a surprise. They have been building out a small, but larger, retail footprint. So, you talk about quarters where you're not selling as much product. Mostly, they still sell high-end jackets. So when you're selling less product, but you have a bigger footprint, and you're putting the pedal to the metal on systems to be able to support that footprint, you end up with more losses in the quarters where you're not gaining the revenue.
None of this is to say that this is awesome news. I'm not excited about it as a shareholder. But I'm not really all that worried. This is a company that was trading at a premium, so this is not unexpected. But I don't think this is a signal for the end.
Hill: Let me get to the math for a second. Seth, while you were chatting, I just used the Google machine. One Canadian dollar equals basically $0.75 in the U.S. $800,000 loss, that's just a shade under $600,000. So, you really look at this stock down 25%, and you think to yourself, "Eh."
Jayson: It seems like a little overreaction. I would have expected something more in like 10% or 15%. But what do I know? People are worried about a lot of stuff today. We've got the trade war continuing to go on, and many other retailers are stinking it up. We're going to talk about Abercrombie, aren't we?
Jayson: Is this a transition? Is this what's known in the biz as a transition? They're also down around 25% percent.
Hill: [laughs] We can, but let me just say one last thing with Canada Goose. This stock, with the drop today, is basically where it was a year ago. It has visited lots of interesting places in between. It's mid $30s today.
Jayson: I was near a double not long ago. I didn't sell it because this is a stock that came to me when I was in New York City. Everybody was wearing these jackets, or a knockoff version. But, even the dudes carrying noodles out of the dumpling shop that I like. These aren't folks who make a ton of money. They're delivery dudes on bikes. They were buying the actual Canada Goose jacket because they didn't want to freeze. It was really cold at that point in time. I came back, I started reading reviews of the jackets, even the dirtbag gear magazines where they frown on boutique expensive stuff. Their attitude was, "We kind of hate to admit it because these are really expensive, but they really are a step above, so if you've got the money, this is what you should go for." And then I started looking at the financials, and I thought it was worth an investment to me. They're doing a good job. But it's always been a high-priced stock. If you can't hurdle that earnings estimate for the first time in a while, everyone freaks out.
Hill: Let's transition to Abercrombie & Fitch. As you said, similar story, at least in terms of the stock, the stock down about 24%.
Jayson: They would kill for 25% revenue growth right now, however.
Hill: [laughs] Yes. First-quarter same-store sales were weak. The thing that struck me was, they're closing three of their flagship stores -- one in New York, one in Italy, one in Japan.
Jayson: That's some expensive real estate, but usually they keep the flagships and get rid of the lousier mall positions. But maybe they've already gotten rid of all those?
Hill: And that's what makes me think -- look, this is not the first time on this show, probably not the last time on this show, that we've talked about Abercrombie's earnings and the resulting stock drop of 15% or more. But this is the first time that I've been struck by the store closings. Even when they've had quarters where they struggled, the flagship stores have done pretty well. Yes, it's expensive real estate. But the fact that they've made the decision to close -- the one in New York is a Hollister store, because Abercrombie & Fitch owns the Hollister brand --
Jayson: Everyone in New York loves to pretend that they're California beach people, which is the fake Hollister story, right?
Hill: I guess. I don't know. In some ways, this seems worse to me than what we just talked about with Canada Goose.
Jayson: Yeah, I think Abercrombie survived their near-death, but brands that are in the middle of that consumer price range -- Abercrombie, remember, used to be higher-priced, and then you had American Eagle at the lower end. And then 2009 hit, and nobody could sell anything. People didn't care so much about spending $80 or $90 or $110 bucks, whatever it was, at the time, on jeans with a label. What happened after that, in my opinion as somebody who held a lot of retail stocks and stunk it up, is that for the core audience for some of these brands, not spending, not doing the conspicuous consumption thing, became more fashionable, more acceptable. And I think they've all struggled since. The lower-priced places have done better. So, you had your Zaras, your H&Ms, they took a lot of the business that used to go to these premium brands.
Abercrombie seemed to have recovered from that. But this 1%-ish growth, which to me is really just flat, suggests to me that there's not a whole lot left here. It's not somewhere where I would put my money, even after a 25% drop today. I'd rather own the scary Canada Goose, which maybe has an intact growth story, than something that clearly doesn't have a growth story and clearly isn't a value.
Hill: We'll wrap up our Retailpalooza with what looked like a solid first quarter for Dick's Sporting Goods. Their sales and profits came in higher than expected. They raised their profit guidance for the full fiscal year. I'm wondering if just what is happening in the market today is why the stock isn't really moving.
Jayson: It's hard to be impressed with this.
Jayson: I think so.
Hill: What if they were lavender scented stores?
Jayson: If they were lavender scented ... I'm so underwhelmed, I can't even make the easy jokes. It's up 6.2%. First of all, what strikes me is the headline. When a company like Dick's is up 6.2%, the stock spikes. Any other smaller company that's in a hotter business, 6.2% would just be a daily move. I guess they make $0.61 a share, $0.59 a share earlier. Sales up 0.6%. They expect to earn $3.20 to $3.40 a share, up from their previous range of $3.15 to $3.35. That all sounds great. But this is another slow-growth business. The problem is that same-store sales were flat. That only looks good when you consider the drop the year before.
I think the problem they're going to have, even though online sales were up a little bit more, is that for a lot of this type of gear, consumers are increasingly turning to the app from the brand itself. If you're buying Under Armour, you can buy directly from their website and get a decent deal. Same thing for many of the other brands. And then you've got competitors like Lululemon selling similar stuff that you just can't even get at Dick's. So, this to me is a decent result, but I still think the eventual trajectory of a company like this is for flat to slightly "eh" growth for the long term because they just can't compete with online sales for a large portion of what they do sell. Now, some sporting goods, you need to go in and try out. But not everything, especially not apparel.
Hill: Looking at a stock chart, it reminded me, years ago, when you and I would talk about the Gap. And I remember you made the joke, at any given moment, you don't need to look at a stock chart to know where The Gap is trading, because your joke was, it's probably in the teens. There was this stretch of four or five years where Gap was basically there. Now, it's in the 20s.
Jayson: I think it was maybe $15 to $21 or something for the whole time my daughter was growing up.
Hill: Yeah, in that range. Dick's Sporting Goods has basically been in the mid-30s for a long time now. I'm wondering -- Edward Stack is the CEO. His dad started this business. He's been a CEO since the mid-1980s. He's 64 years old. I'm not knocking the guy, but, for any company that has had the same CEO for 35 years, I think it is reasonable for any shareholder or potential shareholder to ask, what is the succession plan for this person? It's entirely possible that some new blood and some new thinking could maybe invigorate Dick's Sporting Good's business and therefore get the stock higher than the mid-30s.
Jayson: Yeah. I really wonder. The problem with Dick's is, consumers love to identify with the retailers, or especially with the brands that they buy. Who identifies with Dick's? I mean, nobody. It's just, maybe it was the most convenient place to get things, and it's not anymore, given the internet.
Hill: Versus identifying with, like, "Oh, I wear Nike shoes."
Jayson: I can go online and order a custom version of Nikes. I can order Adidas from many places. I can order some of this stuff much more easily. Some of these shoes, I can order them from Zappos. They get to the house, I can try them on, send them back if I don't like them. I don't have to pay return shipping. If I like a certain brand, like Under Armour, like I said, I'm going to order directly from them. They're going to have a better selection. I don't think we're going to be talking about Dick's like we talk about Walmart, for instance. Walmart said: "Hey, we've got this digital idea. We have all these stores. How about people order stuff, and they pick it up? Since we're everywhere, that's actually more convenient for a lot of people than having stuff shipped to their house." And it works. Home Depot, very similar story. You might want that stuff sooner. I don't see the same opportunity for innovation at a Dick's Sporting Goods. Maybe they do online order and pick up, but that's not going to change anybody's life compared to how it might be able to do that at a Walmart or a Home Depot.
Hill: Before we wrap up, since it's not just summer travel season, it's summer, period --
Jayson: Is it already summer?
Hill: It basically is.
Jayson: Here, it is. I was a sweat hog this morning.
Hill: [laughs] I feel like once you get past Memorial Day, you're basically in the summer, even though any kids who are in school who are listening to this are like, "It's not summer yet, I've still got a couple weeks of classes."
Jayson: Hey, they should be paying attention. Put down that iPad, iPod, whatever.
Hill: Any health tips for people exercising outdoors?
Jayson: Starting with, don't.
Hill: On our running Slack channel this morning --
Jayson: On our running Slack channel, I wanted to warn people -- I do very well running in the heat compared to most people. I'm tall and skinny so I have very little mass and a decent amount of surface area. But I run in the shade and I run next to a creek, so I'm not afraid to go out even if it's 100 degrees and the heat index is up there. If things get bad, I'll just go sit in the creek. But you do have to be super careful. I'm lucky: I've run enough long races in the heat that I have a very obvious tell when I'm getting overheated. It sounds weird, but I feel like I have a really hot warm doughnut of air around my neck. And it's a really distinct feeling. And as soon as I feel that, I know I need to start walking, get in the shade, stop if I need to, cool off, because I'm getting too hot and I'm going to start getting dizzy after that.
The important thing to remember is, you can't hydrate your way out of being too hot. If you're too hot, you need to lower your temperature. That means you have to discontinue the work, get in the shade, get in air conditioning, get in a pool, do something.
Hill: That's good advice, but that you're right, that does sound weird, the hot doughnut of air.
Jayson: The hot doughnut of air. And you may just be going along, and suddenly you get dizzy. If you start to feel crummy, you have to quit exercising. That is really the only fix. If you feel really crummy, you need to hit the SOS on your phone.
Hill: Obviously, people listen to this while they're commuting. They listen to this when they're in their homes, maybe doing stuff around the house, walking the dog, doing chores around the yard. But there are definitely people who listen while exercising. For you people in particular, be careful out there.
Jayson: Yeah. Get your shirt completely wet before you go out. I will often at least get my running hat sopping wet with water so I get the evaporative cooling right away. Shirt works really well, too. But if it's too hot, if you don't do well in the heat, run on a treadmill. Do something else. Skip a workout. You can skip your workouts. It's OK.
Hill: Now you tell me.
Seth Jayson, thanks for being here. 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 has no position in any of the stocks mentioned. Seth Jayson has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool recommends Canada Goose Holdings and Home Depot. The Motley Fool has a disclosure policy.