This video was recorded on March 28, 2017.
Mac Greer: It’s Tuesday, March 28th. Welcome to Market Foolery! I’m Mac Greer, and joining me in studio, we’ve got Ron Gross from Total Income and Jason Moser from Motley Fool Million Dollar Portfolio. Gentlemen, welcome!
Jason Moser: Hey!
Ron Gross: Hey, how are you?
Greer: Guys, I’m good. Let’s begin with Facebook news that looks a whole lot like Snapchat (NYSE:SNAP). On Tuesday, Facebook released its Stories feature in its main mobile app. Stories allows users to post photos and videos that disappear after 24 hours. Does that sound familiar at all? Stories was already part of other Facebook apps like Instagram, WhatsApp, and Messenger. Now, Jason, they say imitation is the sincerest form of flattery. But I’m guessing that if you’re Snapchat, you could do without this type of flattery.
Moser: I would imagine. I think they’re probably thinking, “Wow, at some point, could you not just do something original?” But, I mean, that’s the name of this game. Social networking in general, it’s innovative to a point, but at the end of the day, it’s all about free flow of information and figuring out ways to communicate with people.
So, whether you’re Facebook or Twitter or Snapchat or Instagram or whatever, you’re always figuring out ways to add new little bells and whistles. I do think, as time goes on, it strikes me that — and I’m not the biggest on these platforms. I really don’t use Facebook all that much, I don’t use any of these other things, other than Twitter. But I think, it becomes more and more difficult to use these platforms. It seems like they add more and more bells and whistles to the point that it becomes more and more difficult to use, when really, one of the arguments from inception was that they’re easy to use. So, I wonder if we’re going to hit a point where they become so difficult to use that they start turning people off, because you do hit a point where you start adding so many bells and whistles in the hopes of evolving and innovating that you start scaring people away.
I think that’s something that, while old people like us might consider Snapchat difficult to use, I think a lot of the kids that use it generally like its simplicity and quick, free-flowing nature. To me, the question with Snapchat has always been what can they be beyond the Snapchat app? And when they went public, when they were doing the roadshow, they redefined themselves as a camera company because even I think they realized that just being Snapchat isn’t going to cut it. That’s not going to be a way for them to get big and justify the valuation that the market is giving them today. I do think it’s important to note that whether you are using Facebook or Instagram or Messenger or WhatsApp, you’re still using Facebook. I think that’s a testament to the best strategy in this space — to own a portfolio of a lot of these apps so that you’re going to hit every age group. Facebook is kind of for old people. Instagram is maybe Facebook for younger people. Maybe they’re trying to turn Messenger into a SnapChat style offering, as well. It’s a unique space, but I think it’s really difficult to compete with Facebook because they’re already so big.
Gross: Yeah, I can’t argue with any of that, actually —
Moser: Well, that’s good. Stop.
Gross: [laughs] I don’t think Facebook Stories is going to steal any of Snapchat’s glory. I don’t think Snapchat is actually worried that all of the sudden people are going to start leaving their platform and moving to Facebook. It didn’t happen with Instagram, I don’t think it will happen with Facebook proper. But it does behoove Facebook to have a complete offering — to not have that option to create a story and do those things would hurt it a bit. You want to have all the new bells and whistles on your platform, unless, as you said, it becomes a little too complicated. Now, for my mother-in-law, it’s going to be too complicated. But she just won’t use that part of it, she will continue to like and share things that are embarrassing about her family. But for the folks our age that do want that ability, it’s now, there.
Greer: And I hear you say that no one is going to leave Snapchat, or, people aren’t necessarily going to leave Snapchat to go to Facebook because of this. But if you are Facebook, you’re in a much better position than Snapchat. So, you outlast Snapchat, then you’re the only game in town.
Gross: Absolutely. We’ve been talking about the usability and the apps and the companies. Then we start to talk about the stock and the capital structure and all that stuff. You would never choose to be Snapchat as opposed to Facebook, the behemoth here, with an airtight balance sheet, cash flow flowing in, just an incredible market position. Snapchat, I wouldn’t touch it.
Moser: This is less about stealing people using Snapchat, and more about giving folks a reason not to leave any one of those four Facebook platforms. Snapchat has 158 million daily users or something like that. It sounds like a lot, until you compare it to what Facebook has, and then you realize it doesn’t really matter, it’s relatively inconsequential, especially when you consider that there’s probably a decent amount of cross over there. So, it’s really just about Facebook and all of its associated platforms offering the ability to do these extra things as a value add. It’s less about stealing Snapchat’s users, and more about offering their users more features.
Greer: Let’s talk about Facebook the stock. Shares up around 25% over the past year. Going forward, what do you think about the stock?
Gross: I’m a shareholder. It’s hard to make the argument that it’s cheap as a value investor, because you have to look out into the future so much and rely so much on the future, so I’ll suspend my value investing, I’ll take off that hat for a minute and say, I’m a shareholder. I have no intention of selling the stock any time soon, maybe ever. It’s the kind of stock that I’m just happy to let sit there, and watch what Zuckerberg can do.
Moser: Yeah. I think it’s very easy to justify owning this stock today, and hanging on to it indefinitely. We talked a lot about this last decade being the Google decade, this coming decade is probably going to be more of the Facebook decade, given the nature of the move to social. I think that’s an advantage that Facebook holds over Google. Google is very utilitarian in nature. You go to Google to find something, and then you go somewhere else when you found what you wanted to find. Facebook is garnering a lot of eyeballs that stick around those properties for a while. So, it strikes me as probably a bigger opportunity over the coming decade to be part of that Facebook story, versus something like Google, given those are the two big players in the ad space.
I do want to make the point that, it’s a big company today, $400 billion plus. You hear a lot of people talk about, in order for the stock to double, they need to double their market cap. That’s not necessarily the case. They could, in theory, buy back shares, return capital to shareholders in certain ways that the company doesn’t necessarily have to double for the stock to do well. With that said, it’s a very big company. As it stands, it’s still just an ad play. Now, I say “just” — it’s a massive market opportunity. But, we’ve seen how far Google has gotten thus far with it, and that’s pretty far. Facebook has already caught up to it, more or less. So, looking out forward, it’s a bit of a reach to say this is a no-brainer winner, but I think it’s a pretty steady-eddy holding that you could hang on to for a while.
Greer: Guys, it was a good day for Darden Restaurants. Shares up big on Tuesday on better than expected earnings and news that Darden’s would buy Cheddar’s Scratch Kitchen.
Gross: That’s a good name.
Greer: Ron, that’s a great name, it’s such a great name. We should also mention that Darden’s owns Olive Garden and Longhorn Steakhouse, among others.
Gross: Capital Grille, my favorite. That’s a good one.
Greer: Capital Grille. What do you think?
Gross: The company is doing good, and a lot of restaurants are not. The results were pretty impressive, just shy of a 1% same store sales across the board. The highlight was Eddie V’s, their seafood concept, at a 4.7% same-store sales increase. That’s pretty impressive. Olive Garden, where most of their profits come from, and Steve Broido’s favorite, of course, for listeners of the radio show, up 1.4%. So, not too shabby either, especially when you look out across the competition and see there’s a lot of folks that are struggling right now. Profits were up strong. They increased guidance. Then, as you said, a $780 million acquisition of Cheddar Scratch, 165 locations across 28 states. It’s a value chain. Let me hit you with some menu items. Perhaps I could interest you in some baby back ribs or some chicken fingers. Maybe J-Mo would like a Monte Cristo sandwich.
Greer: Chicken-fried steak.
Gross: Nothing wrong with that.
Greer: Chicken-fried steak, Ron.
Gross: Well, there’s a lot wrong with that.
Greer: [laughs] Bite your tongue!
Gross: [laughs] But, this is nice. They’re adding a casual dining chain to their portfolio. I like that move. It’s hard to say whether or not the $780 million is a good price, because I don’t have a lot of financials on this company. We know that they’ve grown revenue 12% to 15% over the last 10 years. Not too shabby. That sounds good to me. Darden does say it will be accretive to their earnings pretty quickly. That’s nice to see as well. Darden doing well.
Moser: I continue to be amazed by the performance of Olive Garden’s to-go side of the business. It’s not a top of mind when I’m looking for something to go. But they have clearly hit on something here. The performance there, it’s continued double-digit growth in the to-go segment of the business that’s just, I’m astounded.
Gross: I’ve never used it personally. I wonder if Steve has.
Moser: I don’t remember the last time I went to an Olive Garden, but obviously, a lot of people are going. I think a big catalyst for Darden was when they spun off a lot of the real estate that they owned into Four Corners Property Trust. They had a lot of restaurants in there where they owned the real estate. Basically, they were trying to whittle down their cost structure and just be a really good operator of restaurants. So, they spun off a lot of that property to this property trust. I think it helps shore up the balance sheet. I think it helped them focus on doing one thing and doing really well, and that is bringing a number of good, middle of the road brand names into their universe, and being able to grow those footprints. Again, kind of like that Facebook strategy. Whether you’re going to one of these restaurants, you’re still going to a Darden restaurant at the end of the day. And that’s very good for them.
Greer: And I want to go back to the name. I think Cheddar’s Scratch Kitchen —
Gross: It’s pretty good.
Greer: I think that’s the greatest name. I think the worst name is Carl’s Jr. We still don’t know how Carl came into possession of Jr. Because it’s Carl’s Jr.
Gross: It’s like Ruth’s Chris.
Greer: Oh, that’s terrible!
Gross: Yeah, it’s hard to say.
Greer: That was some mash up of someone who was married, and then they’re not, but, Carl’s Jr.?
Gross: Cheddar’s Scratch does it.
Greer: It’s confusing. I don’t want to be confused. I just want food.
Gross: I just want baby back ribs. You just want chicken-fried steak?
Greer: You don’t like chicken-fried steak?
Gross: No, I do, but it’s not the healthiest piece of food.
Greer: Oh, and all the other items were, I’m sorry. Ron Gross, picture of health.
Gross: Smothered in that white gravy, that unidentifiable white gravy.
Greer: That’s why it’s good. We wrap up with tough time for Whole Foods. According to a report from Barclays, Whole Foods traffic has fallen by 14 million customers over the last year and half. That’s a 3% drop. I should add that Whole Foods co-founder and CEO John Mackey is on the board of directors of the Motley Fool. Jason, according to the report, Kroger is the big beneficiary. Nearly half of Kroger stores are within three miles of a Whole Foods.
Moser: Yeah, it was pretty smart to do that, huh? I guess maybe they felt like they were on to something. This goes back to what we’ve been talking about a lot in this space. Scale is really a tremendous advantage. Having that big footprint, where you can get things from point A to point B in the quickest fashion, and really carry a very wide selection of offerings, both private branded and brand names, is immensely advantageous. I think what we always wondered with Whole Foods for a time was, would they be able to get rid of that Whole Paychecks moniker that they had earned. It seemed like they were doing a pretty good job of that. They were making that way toward offering more 365 branded items, which certainly were more affordable. And I think that attracted more customers, for a time. But they really have run into a buzzsaw here in that every grocery store concept in the country is copying that model now, and bringing more and more naturals and organics into their mix. And furthermore, we talked about this, Whole Foods doesn’t really do a very good job of attracting the crossover consumer. So, they don’t have a lot of what people really still want. And that’s a big problem, because now you’re telling me I have to go to more than one place to get everything.
Greer: Yeah, I don’t want to do that.
Gross: That was always, though. You would go to a regular supermarket for your paper towels and household items. Then, if you wanted organics or really good produce or really good meat and fish, you would pop over to Whole Foods. Two trips. Kind of annoying. Now, Kroger’s brand, Harris Teeter, you get a lot of that right there. Now, I do not think the quality of the produce in the meats are the same at Harris Teeter and Whole Foods. Whole Foods still does a better job. If I have a dinner party, I’m still going to Whole Foods. But on a regular, weekly basis, it becomes less necessary to go to Whole Foods, which is never good for a business model.
Greer: So, what does this mean if you’re Whole Foods investor, or you’re someone who’s looking at the stock?
Gross: I am a Whole Foods investor, and I’m not that thrilled about it lately. Even over the last five years, the stock is down around 30%. In my head, it was a more recent decline. But they’ve really been on the downturn for quite some time. I’m not a seller yet. To be honest, I’m not sure why I’m not. It’s because I like the experience, I’m a consumer and I shop there, and I’ll continue to support it as a shareholder.
Greer: And you have lunch there a lot.
Gross: I have lunch there almost every day. [laughs]
Greer: So, they have their prepared foods, some of the stores have bars now, so they have some built-in advantages, right?
Gross: They do. I remain a loyal customer, and therefore, for now, I remain a loyal shareholder as well.
Moser: I don’t know. I’m not a Whole Foods investor. We did own shares of Whole Foods in Million Dollar Portfolio, but we sold them a little while back. I think really, the icing on the cake for us was in the most recent quarter, when they finally came to reality here in that they needed to pull back on what they saw as their full market opportunity. For a while, they were targeting 1,200 total stores around the country, which, we felt like, was too many. They, I think, now realize that that’s too many. They pulled back on that guidance. They put that 365 store concept on hold to reasses which way they want to go with it. Right now, they’re talking about going back to their roots and really focusing on that core Whole Foods customer that helped get them to this point today. It’s almost like saying they’re going back to that Whole Paychecks moniker. They’re going back to targeting that consumer. Honestly, that probably is their best bet. I think we’ve come to a point where we realize, Whole Foods isn’t going to be able to grow as much as a lot of people thought it was going to. So, maybe their best bet is to be that high-end grocer that focuses on a smaller overall market opportunity, but serves that market opportunity in an excellent fashion.
And if they do that, it can certainly still perform well, possibly even see margins get back to expanding if they’re able to keep on raising those prices a little bit. Because, for the last few years, they really have been focusing on value, to the extent that you would get it even on the grocery bags. If you have your grocery bags from Whole Foods you would see on the bags that they were talking about daily deals and value offerings and all this stuff. They were getting down to having to compete on pricing with all of these other bigger competitors out there. They can’t win that game. They’re too small to do it. So, then you have to wonder, really, is the path to success here some type of an acquisition? Do they need to acquire something like a Publix to grow that market opportunity and focus on a number of different tiers? Sprouts, a company that just went public shortly ago, a competitor to Whole Foods, sounds like they may be acquired by Albertsons, which also owns Safeway. So, you can certainly see consolidation in this sector. I think Whole Foods is more than likely going to have to either make an acquisition of some sort, or they are really going to be focusing just on that whole paycheck customer, and accepting the fact that they can only become so big.
Greer: I’m not saying it would have been a perfect fit, but I think Whole Foods should have gone after Cheddar’s Scratch Kitchen.
Gross: I knew you were going to say that! That’s awesome.
Greer: [laughs] OK, guys. Jason, Ron, thanks for joining us!
Gross: Thanks, Mac!
Greer: As always, people on this program may have interests in the stocks that 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 it for this edition of Market Foolery. This show is mixed by Dan Boyd. I’m Mac Greer. Thanks for listening and we’ll see you tomorrow![“Source-fool”]