Saturday, 8 June 2024

Investor Spotlight on Chewy, Dick’s Sporting Goods, and Cava

by BD Banks

In this podcast, Motley Fool host Ricky Mulvey and analyst Bill Barker break down earnings from Chewy, Dick’s Sporting Goods, and Cava.

Then, Motley Fool personal finance expert Robert Brokamp discusses the fundamentals of 529 plans and saving for college with Roger Young, CFP and thought leadership director at T. Rowe Price.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on May 29, 2024.

Ricky Mulvey: The date is 5/29, so we’re putting the spotlight on a specific kind of investing account. You’re listening to Motley Fool Money. We’re diving into 5/29 plans a little later in the show but first up we’re talking retail and to do that is Bill Barker. Bill, thanks for being here.

Bill Barker: Thanks for having me.

Ricky Mulvey: I think the big theme of the earnings that came out today is that consumers aren’t dead yet. Retail stocks like Chewy, Dick’s Sporting Goods, and Abercrombie and Fitch all up double-digits on earnings beats. Let’s focus on Chewy though. Sales were up 3% but the number of active customers are down 2%. You wouldn’t know it looking at the chart, so why are these pet investors so happy about a company that’s losing customers?

Bill Barker: Well, this is a story that is distinct from the other two in that the stock is not building on strength as Abercrombie and Fitch and Dick’s Sporting Goods are which we’ll talk about in a minute. This is a stock that is bouncing back from essentially all-time lows post-IPO lows more or less achieved very recently. Finally, there is a decent report, some guidance met and exceeded and some guidance reiterated for the rest of the year. Stock has a lot of work to do even after today’s 27% move up, it’s still off for the year slightly. This was the first chapter in what could be a story back there’s a long way to go for Chewy to ever regain the heights that it had during the pandemic and the expectations that the stock had priced in during that time but it was a good report and although fewer customers by a hair they’re spending more. If the loyalty of the existing customer base is augmented by people buying more, spending more on their pets. Part of that is inflation, part of that is just increased support of pets and the new offerings that Chewy has. Altogether, it’s a good story and this was a very easy act to follow in terms of Chewy’s recent performance.

Ricky Mulvey: As a Chewy investor, I was happy to have a little bit of a breather still in the red if I look back any amount of time but it was nice to see a little green today. The company also might have a bit of a tailwind mentioning for the first time since 2022, “We observed a positive balance between pet adoption and relinquishment.” It sounds like the balance is starting to shift after a bunch of people adopted pets during the pandemic and then gave them up because they made a bad choice. I don’t want to get into that because that gets me to the dark place. Let’s talk about the share repurchase program Bill. Chewy announced its first-ever stock buyback, $500 million authorized. The amount of time is still to be determined. Are you taking this as a sign of maturity from a former growth company?

Bill Barker: Well, they are finally making money. Stock repurchase is, first of all, authorization does not necessarily translate into actual stock buybacks a lot of the time, but it is a show of some confidence that stock will be higher in the future than it is today and that capital might be allocated capital that’s available because of actual earnings’ profits. It’s a thoroughly good sign and they’ll be an even better sign if it’s actually employed. I generally always like to see stock buybacks executed. The announcement is the first step in execution, so again a good first step for the company.

Ricky Mulvey: Also making up a little bit of the dilution from a share-based compensation. You mentioned Autoship earlier and Chewy is very much an Autoship story where about three-quarters of their revenue come from auto-ship but they’ve also got some other growth initiatives. Pet insurance, vet clinics, pet telehealth, where you can spend 20 bucks to talk to a vet for 20 minutes; are any of these growth initiatives interesting to you?

Bill Barker: They’re all possible avenues of growth, I would guess that not all of them will stick that they’re going to try as everybody else does, whether it’s PetSmart or all the other competitors, adding the availability of pet insurance and vet clinics into the mix. I think there’s a reason why everybody does that, it’s good to have confidence in one stop for all your pet needs and whether they end up being more successful than the competition which they need to do to maintain all of those, I don’t know. I would bet against all of those being home runs but I think that is a good place for them to experiment with their growth story.

Ricky Mulvey: Let’s talk about Dick’s Sporting Goods. Dick’s Sporting Goods is one of those quiet market beaters and it’s up 17% this morning at the time of this recording comparable sales up 5%, that was more than double what the analysts expected. It seems like the customers are really shelling out on shoes. Nike, the popular on running shoes, HOKA, Adidas. Is this a shoe story? Is there anything else driving the growth over at Dick’s Sporting Goods?

Bill Barker: Well, I think in the great battle between whether people are spending money on stuff or experiences, Dick’s employs both. You’re buying the stuff in order to have more athletic experiences most of the time; some of it is for fashion and they’re doing OK there, that’ll come and go. I think that it’s a good sign when people are out exercising more and Dick’s, as you say that they’ve been quiet, it’s certainly not quiet today up 15% or so and I think the stock is more or less quadrupled in the last 3-4 years. Most of that has been on multiple expansion, it is continuing to grow and it had some nice post-pandemic growth when people got back outside but It’s a lot of multiple expansion. It hasn’t expanded to dangerous levels by any means, it’s around 16-17 times earnings but it lived in a 9, 10 times earnings valuation for quite a while until recently.

Ricky Mulvey: Well, I think some of that might have to do with the story changing where Dick’s Sporting Goods is not opening up a lot, a lot of stores. Since Lauren Hobart became the CEO back in 2021, they’ve slowed down on expanding their square feet. They’ve repurchased a lot of shares, it’s still profitable. Retailers don’t need to open up a lot of stores to return money to their shareholders. Could this be a next Home Depot or AutoZone-type story for those holding Dick’s Sporting Goods shares?

Bill Barker: Well, for the shareholders of Dick’s Sporting Goods, I hope so. It’s been a remarkable way to maintain great returns. In AutoZone’s case, dramatic and debt-fueled repurchases, just relentless over the last 20 years they’ve opened plenty of stores. Home Depot is much more static in their number of stores but they expand their square footage. If Dick’s comes close to either of those and you’re right that the capital allocation story, as long as they can hint toward that kind of model. That is part of what is fueling this multiple expansion. Now, how much further the multiple expansion could go? I’m not sure but certainly Home Depot and AutoZone are higher than that.

Ricky Mulvey: You’re saying we’re not the first people to notice this?

Bill Barker: I’ve noticed they’ve started having more noticeable commercials on TV maybe it’s just what I’m watching.

Ricky Mulvey: I don’t watch a ton of live TV outside of live sports and I don’t think I’ve really seen many Dick’s Sporting Goods ads on any live sports right now.

Bill Barker: Well, I’ve been watching the French Open and some tennis and they’ve got a couple of celebrities. Catherine Hahn, big one, which is an interesting choice. If not the first thing I would have associated with Dick’s. But anyway, they are gaining presence and they are looking to attract more audience. I think it’s working.

Ricky Mulvey: Any — you mentioned the multiple expansion I threw some flowers, Lauren Hobart’s way, but any warning flags that you think its investors should watch before I get too excited about this company and put it on my watch list?

Bill Barker: I don’t see any warning flags. I guess the multiple expansion is the newest and most interesting part of this dramatic stock performance in the last couple of years. But I think of that more as being interesting in it’s past multiple than the present. The present multiple doesn’t wake me up and cause me concern. The past multiple probably should have alerted me to the opportunity here.

Ricky Mulvey: Let’s talk about Cava, which also reported today. It was moving down a little bit, I think it was like 2% this morning down, but are you a Cava fan? Have you had Cava?

Bill Barker: Yes, I am a Cava fan. It’s good food. Chipotle with a different cuisine more or less. I like Chipotle, and like Cava, so I’m not surprised that they are having great success opening as many restaurants as fast as they are. And it seems to be working out quite well for them and their investors.

Ricky Mulvey: If you look at the two-year customer growth, it’s quite a bit for Cava, same restaurant sales up 31% over the past two years. Traffic growth up, 17% over the past two years. But I have a quibble with this one, which is that the number of people going into Cava restaurants for this growth story has declined over the past year. The explanation that was given was the shift in holiday weeks, so actually it’s up. But what did you make of this decline in same-store traffic for Cava? Is this something that should keep its investors up at night?

Bill Barker: Not up at night. Investors don’t seem to be too afraid of this report. I think that holding onto the exceptional growth that they had the year before is an achievement. The two-year number is very impressive, but fueled mostly by last year. But they didn’t relinquish all that extra traffic. They just maintained it more or less. The holiday week stuff is something I’ve seen many, many times over the years. I don’t know exactly where it was. I think Easter was in both holiday periods. I think they have not put out much to be concerned about. If they do lose traffic again in this coming quarter then I would expect that that would be a cause for more concern. And given the multiple on this stock, it cannot have very many questions around it and maintain the kind of multiple that it’s got.

Ricky Mulvey: Let’s talk about the multiple. Stock’s at 11 times sales, which sounds like a software company, not a restaurant with a fairly low operating margin. You’ve mentioned the comparison to Chipotle. What needs to be true about this company’s growth for that kind of multiple to make sense for its investors?

Bill Barker: That it does something that looks like Chipotle, I think, which is easy to say and harder to do. And the comp group for Cava, to the extent that investors say, well, the comp group is Chipotle, and therefore, you wouldn’t have suffered by buying Chipotle when they had 350 restaurants and holding to today, you would have done extraordinarily well. But the comp group includes more restaurant concepts than just Chipotle. If it ever starts looking a little bit more like everybody else, then the multiple comes crashing down to the extent that it can say, we’re early in the game, Chipotle minus the people getting sick at the restaurants episodes that Chipotle suffered through, that they’re going to be a darling.

Ricky Mulvey: I want to tie these companies together and this may be a bit of a shoe horn Bill. But I think you’re seeing some CEO incentives playout. And the incentive that I’m thinking about specifically is how much stock does the CEO of the company own? For Chewy, it’s about $10 million. Over at Dick’s Sporting Goods with Lauren Hobart, it’s about $58 million. Brett Schulman, a co-founder CEO of Cava has about $81 million. Do you think we’re seeing any of the incentives play out with how the stocks have performed or the capital allocation decisions that these leaders are making?

Bill Barker: Well, I didn’t know a little bit more than just how much in dollar figures they own today. Because in the case of both Cava and Dick’s, you’re talking about stocks that have doubled, tripled, quadrupled over relevant time periods. Whereas Chewy, once upon a time was 10X the price that it is. If the CEO had all that invested the whole way through, he’s got 10%, 15% of what he once upon a time had. In terms of the allocation, what their annual compensation package looks like, I would certainly want to know that for each of these companies before investing in them. But today’s numbers are a reflection, at least in some part, by what the stock has done prior to today. I think that the fact that Chewy’s CEO has got 10 million is more a function of everybody having lost a lot of money owning this stock, rather than his not being fully enough invested in it.

Ricky Mulvey: It’s just so much easier to jump to conclusions though. Anyway, Bill Barker, thanks for breaking it down. Appreciate your time and your insights.

Bill Barker: Alright, thanks. Thanks for having me.

Ricky Mulvey: Hello, this is Ricky. I want to share a podcast that’s making waves. It’s called Pivotal with Hayete Gallot. Hayete Gallot is Microsoft‘s Corporate Vice President for Commercial Solutions. And in her podcast, she talks to innovators who are using all kinds of technology, including AI, machine learning, the cloud, and more to shape the future. Her guests come from global brands like Accenture, CarMax, and REI, and from groundbreaking start-ups. She also brings in voices like Arianna Huffington, who founded a start-up called Thrive Global and is building an AI powered well-being coach to help people live healthier lives. If you’re interested in tech or want to build something, you’ll get a lot of inspiration from those who’ve done it on the Pivotal podcast. Go search for Pivotal on your favorite podcast platform and follow for updates.

Alright up next, Robert Brokamp breaks down the basics of 529 plans and saving for college with Roger Young, CFP and Thought Leadership Director at T. Rowe Price.

Robert Brokamp: Roger, let’s start with you just giving us the basics of a 529 college savings plan.

Roger Young: Well, thanks, Robert, glad to be here. And 529 plan is a tax-advantaged way of saving for college or other appropriate educational expenses. That list has actually grown over the years. The basics of it are you put in money, you don’t get a tax break at that point. But if you use the plan for qualified expenses over the years, when that money comes out, you don’t pay any taxes on the earnings or the principal. You could think of it a little bit like a Roth IRA account for education. Obviously with different rules than within a Roth IRA, but similar in terms of the tax benefit. The benefits of it from my mind are obviously the tax aspect, but also from a perspective of earmarking that money for college. And I’ve talked to so many people who have said, it was just comforting to see that money was set aside and ready for when the college bills came up, whether it was enough is another matter, but having that money there is a huge advantage. And studies have found that having an account earmarked for college at all really increases the likelihood that that child is going to go to college. Very nice benefits both psychologically and financially. And of course, you can invest the money which tends to have better growth potential than just putting in a savings account. There are ways that it discourages you from taking the money out for other things. Not too punitive, but but there are penalties if you don’t use it in the appropriate way. I have been a big proponent of 529s, and used it the myself and seen a lot of people use them very successfully.

Robert Brokamp: Just so everybody knows, 529s generally are sponsored by the states, but you don’t have to participate in your states plan. But that probably is the place to start because you might get a deduction on the state tax return, not federal but state. But the rules vary so widely, you definitely need to understand your state’s rules. Let’s say we’ve sold people on the benefits of saving for college. But then the next question I have is, well, how much should I be saving? You recently issued a report co-written with your colleague, Judith Ward, providing people with a starting point to think about if they have a newborn. Tell us a little bit about those guidelines.

Roger Young: Starting point is a great way to put it. Just upfront, rules of thumb like this, I was very reluctant to put out a number, so to speak, on how much you need to save per month for your child’s education. My colleagues won me over and said, a lot of people just have no idea of what the ballpark of that number ought to be. So if we give them a number that’s reasonable with certain caveats, well then that’s at least a place to start and then think about, well, why is my situation different? The number that we came up with for a monthly amount to put in from birth of your child up through college even, is about $260 per month. What does that get you potentially and what are the assumptions? We’re talking about a public college, we’re talking about with room and board. We’re expecting that you might get a 6% return, not guaranteed of course, but a 6% return on the money you put in, and we’re assuming the college costs inflate at around 5% per year. Hopefully, those are somewhat conservative assumptions. The other thing that we’re assuming is that you’re aiming to pay for half of that sticker price of college. Sticker price is an important concept because most people don’t end up paying necessarily the sticker price. Some people do, but a lot of people don’t pay full sticker price. On average, the parents end up kicking in about half of that money toward the sticker price of college. Where does the other half come from? Roughly 25-30% of it tends to come from scholarships and grants, so free money, so to speak, toward college. Then the other, call it 20-ish% comes from other sources. That can include loans and student income and other gifts from other people, so given the actual experience people have, and the statistics showing that about half of that money tends to come from the parents, we based it on getting to that 50% number. In those assumptions, you heard a lot of things that people might be thinking, well, my situation’s different, I want my kids to go to a private school or I’m willing to start out with community college and have them living at home. I think my kid’s going to get a huge scholarship or I don’t think they’re going to qualify for any scholarship at all. Lots of levers on that, but the $260 a month is a starting point to consider.

Robert Brokamp: Totally on board with recommending that people don’t try to save for every last penny before someone goes to college, for the reasons you cited for sure. A couple of others to consider might be that when your kids goes to college, you’re generally in your late 40s, early 50s, ideally you’re in your peak earning years, so hopefully you have higher income so some of it can just come out of cash flow. When your kid goes to college, some of your household expenses will drop. Maybe just slightly but a little bit. In my own personal experience, I have four kids, last year was our first year as empty nesters and our grocery bill and our restaurant bills were much lower than when we had four kids at home. Like the water bill will be a little lower, so it’s not major, but every little bit helps.

Roger Young: The milk bill went down in our household.

Robert Brokamp: It’s so funny you say that because that’s the thing my mom said. My parents also had four kids and she said it took her a while to stop buying so much milk once we all went to college. Anyways, so there are other ways to do it. I would say that I think obviously, one issue is that the assumption that you provided assumes a good bit of financial aid. Many people listening to this podcast probably won’t get a whole lot of aid. So what do you think about in terms of how people should assume or maybe probability weight, the possibility that they’ll get any financial aid?

Roger Young: That’s a good question and it’s really hard to assess that when you’re starting out the savings plan. I became a father at age 30 and my financial picture changed up and down a lot over the next 20 some years. It’s hard to know, are we going to qualify for need-based financial aid and what type of college is my kid’s going to go to? If they’re going to a school where they’re in the top 20% of applicants, they might get some scholarship money. If you’re really determined my kid is going to go to an Ivy League or very high top-tier school, they don’t give merit-based state at all. Yes, I would say be cautious about the amount of aid that you assume, especially if you’re a high earner. What I’ve said to people over the years is you just don’t want to be in a position where you have high income and little savings. That’s a bad combination, and you’re in for a bit of a rude awakening, and that might limit the options you have heading into the college years, and of course, make adjustments over the years. If your kid’s aptitude and desires are going to change, then you’ll see what that looks like and you’ll see what your situation looks like. Then as you get closer, you use the college net cost tools on their website. Their calculators can give you a much better idea of what to expect, both for need-based aid and potentially for the merit aid.

Robert Brokamp: I’ll just further elaborate on some of the points you made. When it comes to the financial aid formulas, income is the biggest determination, much lower than savings. Having a high income but not much savings is really going to put you in a bad situation. In terms of savings, parental savings actually don’t count so much, kids savings do factor in. That’s a consideration when you think about who owns the assets in terms of saving for college. I love the suggestion of going to a college’s financial aid website because most of them will have a calculator there or point you to a calculator. You put in your information and it gives you an idea, not a guarantee, just an idea of how much aid you’ll get. It’s very helpful, especially as you get closer and you have a better idea of what your financial situation will be in those college years to give you an idea of how much aid you’ll get. Let’s move on to some other sources of savings, and that could be grandparents or other well-meaning relatives. You’ve written about this as well. How can grandparents or other people help save for college?

Roger Young: Well, interestingly, for grandparents, the situation has gotten better recently. In fact, with this school year, if they put money into their own 529 accounts. They’re the custodian and the beneficiary is the grandchild, when that money gets spent, gets taken out to pay for college, that’s no longer punitive in terms of financial aid for the grandchild. Up until this year, it was. It could have a big effect because it would be considered income of the student, which is the most painful in the financial aid calculation for a family. But that has gone away, which is nice, and there have been other changes to those financial aid calculations that maybe we’ll come back to, but the 529 is increasingly a good way for a grandparent. The other thing that’s interesting for a grandparent with a 529 is you can maintain control over that money in a 529, which you can’t necessarily with other types of gifts. If you’re worried about things like estate taxes, it gets that money out of your estate. Now again, that’s probably not an issue for most of the people listening. But for some people, they think, wow, I want to do that as much as I can and I want to take advantage of. You can put five years of gifts in at once and all of that. There’s definitely a population where if you’re a grandparent and that’s a priority for you and you have the means to do it, it’s a great way to help out and pay it forward to another generation.

Robert Brokamp: That change to what is the fast free application for federal student aid just took place this year. I’ll point out that some colleges have their own forums. Some colleges have the CSS profile that’s like 200 or so, mostly private, some public schools. As I understand it, they still might factor in grandparent assets. But overall, I think it’s almost too big of a loophole where you as the parents should not own the 529 if you think you’ll get aid. It really should be the grandparent, although you’re giving up control for that. I almost wonder if at some point that’s a loophole they’re going to close, but we’ll see.

Roger Young: For now, it’s something to use as a planning technique.

Ricky Mulvey: 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 anything based solely on what you hear. I’m Ricky Mulvey. Thanks for listening. We’ll be back tomorrow.

Bill Barker has no position in any of the stocks mentioned. Ricky Mulvey has positions in Adidas Ag, Chewy, and Home Depot. Robert Brokamp has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy, Chipotle Mexican Grill, Home Depot, Microsoft, and Nike. The Motley Fool recommends Cava Group and recommends the following options: long January 2025 $47.50 calls on Nike, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.