Tapestry Tanks 20%

In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Seth Jayson look over a few of today's market headlines.

Shares of Walmart (NYSE: WMT) popped on an earnings report that wasn't entirely sunny -- there are a few areas that investors should definitely keep an eye on going forward. Tapestry (NYSE: TPR), the parent company behind brands like Coach and Kate Spade, tanked after reporting earnings. But even though the company is trading at a 10-year low, value investors should tread carefully with this one. Also, Seth recaps some takeaways from yesterday's YouTube Live session about investing in AI (artificial intelligence) and AR (augmented reality) -- how it's harder for individual investors, what kinds of companies to look closer at, 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.

This video was recorded on Aug. 15, 2019.

Chris Hill: It's Thursday, August 15th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, Seth Jayson in the house. Thanks for being here!

Seth Jayson: You're welcome! I should be out watching the ticker tape coming out of those clattery things that we have under glass like a roast pheasant that show us what stocks are doing, because it's up and down. While we're in here, we don't know whether we should be panicking or wearing monocles and top hats.

Hill: [laughs] Can't we do both?

Jayson: [laughs] Can't we do both.

Hill: We're going to talk retail today. We're also going to talk a little bit of artificial intelligence since you and I and Jason Moser had -- I had a good time on YouTube yesterday.

Jayson: I had a good time. We talked about an AI yesterday. I would like to purchase an AI.

Hill: Yeah, you can go into stores and buy one. Speaking of buying stuff, let's start with Walmart. Second-quarter same-store sales up nearly 3%. This is the quarterly reminder that Walmart sells a ton of stuff: $130 billion in revenue in this quarter for Walmart.

Jayson: Yeah. Everybody, including investors -- the stock was up 5% or something when I looked, near an all-time high -- pretty excited about this. I thought it was a decent quarter, but there were things in there which surprised me and made me a little less sanguine. To hit the good points, this was 20 consecutive quarters -- that'd be five years -- of growth. Pretty good. They gained share in grocery, which I think is important for Walmart. Something like 56% of revenue now is grocery. I have to say, as somebody who's not a fan of Walmart, in general -- I don't enjoy the shopping experience -- their grocery has always impressed me. I think it's a similar situation to Costco. They have buying power, they have scale. You go in there, things turn over rapidly. They generally have pretty good stuff at pretty good prices. That is good news for them.

Bad news if you sell to Walmart is, apparently this whole inflation and tariff thing, not a huge deal at Walmart right now, although analysts who do this sort of thing apparently priced a basket of stuff and said that you're paying about 5% more than you were last year, which kind of puts that 2.8% comp growth in perspective. On the other hand, more cost increases are being borne by the suppliers to Walmart. So, say you and I buy some stuff from China that we then reconfigure and/or move it on to Walmart -- we're the ones getting pinched. This is classic Walmart. Back in the day, this is how Walmart was able to consistently drive down prices. They have the scale to continue doing that. So consumers who are not seeing inflation as a result of the trade war right now, they have Walmart to thank for that, a little bit. But that can only go on for so long. You can only squeeze the suppliers for so long before they cry uncle or they just can't do it.

Hill: I'll just throw in there, another good quarter for e-commerce. They continue to grow that channel.

Jayson: Something like 37% growth.

Hill: You mentioned the groceries. I think it's impressive to see a company, particularly a company of this size, very clearly stating what they're going to be doing, what their vision is, and then executing against that. With every quarter like this -- because I agree with you, this was a good quarter, somewhere in the good to very good range. This was not some amazing quarter for Walmart. But their ability to continue to grow the e-commerce channel makes the acquisition of jet.com -- I think they paid $3 billion for it -- look better and better with every quarter like this they put up.

Jayson: It does, unless you care about the profitability there. And this is where they're actually buckling down a little bit, trying to get rid of one of their... what was it, ModCloth? One of the women's apparel online buys they made, and trying to tighten their belts there, because they're losing more money online. And those losses are growing. And they're telling investors to brace for it. And that is interesting and probably counterintuitive. Most of us probably think online sale should be easy, because once you've got your computers set up over there, then everything else should scale really quickly. It doesn't work that way. Part of the reason is, you have to be advertising like crazy, and so on.

I think that Walmart's position in grocery, and the ability that they have to have people order and then pick up, might make that scale more quickly and get to profitability more quickly. Hopefully that works out for them because Walmart is already huge and they need this to fit in nicely with their distribution. You don't want to see them continue to lose money or continue to lose even more money on this forever. They probably would pull out before that would happen. Walmart cares about profits. But I'd like to see that turn sooner.

Hill: Well, and welcome news in the retail industry in the wake of yesterday with Macy's (NYSE: M), the dumpster fire that is Macy's --

Jayson: Poor department stores.

Hill: My recollection is not so much that Macy's was doing a lot of blaming of the consumer, but you look at Walmart's quarter, and for any retailer that is struggling, be very careful about coming out on the conference call and saying, "Well, consumer spending is not what it used to be." It's like, I don't know, it seems like consumers are spending. Maybe they're just not spending at your place.

Jayson: Yeah, it's in different places.

Hill: Let's move on to Tapestry, which is the parent company of Coach and Kate Spade, a couple of other brands, as well.

Jayson: Stuart Weitzman.

Hill: Yes.

Jayson: Which is not really safe for work, sometimes, to go to that website.

Hill: Really?

Jayson: I remember the first time I said, "I don't know who this is," and I looked. It seemed really racy. I thought HR was going to come over.

Hill: Isn't that a shoe designer? Stuart Weitzman?

Jayson: Yeah. I seem to remember that what I saw was mostly somebody wearing just shoes. I'm just saying. Not safe for work.

Hill: Whatever that strategy is, it ain't working for Tapestry, because the stock is down 20% this morning. This really looks like a combination of the fourth-quarter report that they put out, which was not great, and then their guidance for the first quarter of the new fiscal year, which was definitely lower, both on the profit side and on the revenue side, than Wall Street was looking for.

Jayson: I think it's an existential question at this point. When Coach, the company formerly known as Coach, decided to become Tapestry, which is just too cute a name for me -- I prefer to call it rugs --

Hill: With a Z?

Jayson: Rugz, with a Z. It has to have that. The idea there is, "Hey, we're more than just the Coach lifestyle brand. We're so good at this that we can buy other lifestyle brands and see them grow." Now, Weitzman is growing pretty quickly, but it's a small revenue base and it's still unprofitable. That's not helping a ton right now. Kate Spade acquisition is not working out that well. So, if you look at this cynically, you say, "Well, the Kate Spade buy says they're not so great at this, at being this house of brands." And then you have comments by management saying, "Yeah, we're not really going to do any acquisitions for a little while." That also suggests you don't think you know what you're doing or that you just can't find good bargains in this space. Neither of those situations is great for a company that basically is telling you, "We're not just Coach stuff. We're more than that."

What intrigues me is, if you look at the multiples -- always dangerous for a company that's not growing a lot -- it looks like we're trading at sort of 2008, recession-level multiples here. Just over one times sales. The price-to-earnings multiple, unless my data provider is not crunching the numbers correctly, somewhere around eight times? That just seems crazy, even for a company like this that is struggling. Is it a value? I'm going to punt on that because I have a great history of buying companies like this when they're excellent-looking values and seeing them just continue to do poorly.

Hill: Well, you read my mind, because I was going to say, "This stock is basically at a 10-year low right now, so I'm wondering if... " Let's go back to the name for a second. Whatever we think of the name Tapestry, and I think we're both... let's just say we're not huge fans --

Jayson: There are worse groaners, but this one... it makes you want to slap someone in the head.

Hill: It's not great. But the rationale behind the name change is sound reasoning, I think. There were absolutely quarters where they have these multiple brands, and the fact that the name of the company was Coach, if the Coach section of the business wasn't doing well, it would unfairly weigh down the others. So I understand it. Maybe they didn't pick the best name. But these aren't bad brands. Coach is not a bad brand. Kate Spade, Stuart Weitzman, these are solid brands. I don't think they are troubled in any significant way.

Jayson: Well, I think they are in the sense that they're not growing much. Same thing with Deckers and Uggs. Deckers was doing well, but it's such a huge part -- and Ugg is bigger at Deckers than Coach is at Tapestry, is what I'm trying to say. So you have a hot brand like HOKA running shoes, that was growing like crazy, still growing like crazy, that Deckers bought. It's my favorite running shoe. A lot of people are buying them. It wasn't enough to offset the mediocre growth and the occasional shrink at Ugg. If you're a family and you own Tapestry, you're probably fine. You're going to batten down the hatches and just get a bunch of cash flow and nurture these brands in a way that just pays you. If you're a public market investor like we are, I think it's a lot scarier.

Hill: David Gardner is our guest on Motley Fool Money this weekend, so plan accordingly. Just one little housekeeping note.

Jayson: Does that mean, like, get your 12-sided die out?

Hill: No. Get ready to take some notes.

Jayson: Make some notes? I want to play D&D [Dungeons & Dragons] with David. Does he still do that?

Hill: I don't know.

Jayson: I hope so.

Hill: I've never played Dungeons & Dragons.

Jayson: Oh, it's fun, and I think it would be so much more fun with David. I need to go to game night.

Hill: Yeah, I was going to say, I think that's probably easy to arrange, given David's enthusiasm for board games. Yeah, I bet you could swing that. So as I mentioned at the top, yesterday afternoon, you and Jason Moser and I did a live event on YouTube. Thirty minutes. Took questions from the viewers. But the main topic we were talking about was artificial intelligence, augmented reality, areas that both you and Jason have really dug into lately. Having done a few of these live Q&As on YouTube, my experience as the person hosting it has been that, we have a topic that we're talking about, and then once the questions start to roll in, the questions are about, generally, whatever stock is on a given person's mind. It's a pretty wide range. I was pleasantly surprised to see, the questions that we were getting yesterday almost across the board were about AI and AR, which tells me a couple of things. One, people are really interested in these two areas. And two -- and this is something we talked about on the video -- there are so many applications. I said that, I tend to think of augmented reality, my first go-to there is Pokemon Go. I just have this very narrow --

Jayson: You remember dodging those people on the running trail, right? They were staring at their phones.

Hill: Yeah. So, there's that. And then, for AI... Well, I was going to say Hal from 2001: A Space Odyssey.

Jayson: Ooh, scary AI!

Hill: So we start getting all these questions about, "What do you think of the applications in the pharmaceutical industry?" "What do you think about tourism? Hospitality?"

Jayson: How did we get a piece of the internet that was so on-topic yesterday? That was awesome!

Hill: Yeah, it really was. Did any questions surprise you?

Jayson: No, they didn't. They were good. Even the marijuana question, which is inevitable, was linking into AR. It was, "Hey, do you see any applications here?" And of course, I kind of made light of it. But if marijuana became a big industry, it would mostly be an agricultural industry at some point, and there are actually a ton of AI applications in agriculture right now. A lot of it is drone-based analysis of fields, and so forth. So there's AI and AR in ag. And if marijuana became a huge thing, it would mostly be an ag thing. And there you have it.

It was a fun talk yesterday. I continually stress that investors who are looking at AI, try to step away from the hot topic -- that's a retail store -- from the hotness of the idea. In other words, it's tough to just go try to find this little weird AI pure play that's got some technology that's going to change the world, and it's going to go from a $500 million company to a $500 billion company. As I mentioned yesterday, the global market for ideas in artificial intelligence is saving us from the opportunity to do that, which is both good and bad. A lot of the smaller AI shops that are doing interesting things with algorithms or with technology, they're private, and once they're interesting, somebody else buys them. The opportunities for us as public market investors really lie in sifting through companies that we like, and I think there are already strong companies, who are then able to really augment what they're doing, to really increase their effectiveness, by using artificial intelligence. And this is not so different from taking a look at companies who were among the first not to sell computer products or something, but to adopt them, and to adopt them intelligently. Same way with the internet. Yeah, there were leaders like Amazon, who first tried to sell a bunch of stuff over the internet, but then you have a company like, much later, Lululemon, or somebody who comes along and says, "Well, we can figure out a way to make e-commerce work for us in a way that works also for our bricks and mortar stores, and really do a lot better." You have to look at AI the same way. Try to find companies you like that are incorporating AI in an intelligent way, because everybody's going to say they're using AI, but they're not all going to be using it effectively.

Hill: Real quick, before we wrap up, because in the description of this episode, I'm going to include a link to the video -- anyone can just go to The Motley Fool's YouTube channel, which is just youtube.com/themotleyfool. The videos are free. You can watch a lot of good stuff ideas coming out of that video that we did. But at the end, you were trying to come up with the name of a British company.

Jayson: Reserves! No, that's an old Bill Mann joke.

Hill: Graphcore?

Jayson: Graphcore, that's it.

Hill: So if you watch the video, just know that the name that Seth's trying to come up with at the end there is Graphcore.

Jayson: Graphcore, which seems like a super cool company. A chip company that's run by a couple of founders who've run chip companies before and done a good job of it. Very interesting. Unfortunately, the likes of you and I cannot buy a piece of it. But if you're Dell or Microsoft or others, you can, and you can also buy their products.

Hill: 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's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Seth Jayson owns shares of Amazon, Lululemon Athletica, and Microsoft. The Motley Fool owns shares of and recommends Amazon, Lululemon Athletica, Microsoft, and Tapestry. The Motley Fool has the following options: short January 2020 $180 calls on Costco Wholesale, long January 2021 $85 calls on Microsoft, and long January 2020 $115 calls on Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com