In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline revisit the retail bracket showdown with eight fresh companies. There are some interesting pairings this time around, so find out which one makes it to the final round. As always, our hosts list strengths and weaknesses, make their case for these businesses, and have fun along the way.
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This video was recorded on June 16, 2020.
Emily Flippen: Welcome to Industry Focus. It’s Tuesday, June 16, and I’m your host, Emily Flippen. Today, Dan Kline and I will be revisiting our retail bracket showdown. So, we’re going to be putting some of what you call, Dan, “the best of the rest” up against, I’d say, last month’s winner. These are some interesting companies we have here.
Dan Kline: It’s a bizarre mix of companies. And some of them, as we talked about a little bit before we started taping, some of them are ones I had to look at and go, “Really, is that a successful company?” And we learned a little bit. These are not as strong as the retailers we did last time, because last time we focused on your Targets and your Walmarts, and the big winner was Costco (NASDAQ:COST), which is about as safe a brand as you could get.
We’re a little less safe in this bracket. You know, this is the, “Will Hofstra win the NCAA tournament?” And, hey, they didn’t play, and we got in. So, we’re the co-champion.
Flippen: [laughs] Yeah. And if you’re just joining Industry Focus or maybe you didn’t have the opportunity to listen to the recording that Dan and I took, maybe it was last month — so, last month we had Walmart, Target, Wayfair, Costco, TJ Maxx, Dollar General, Best Buy, and Home Depot in our bracket. Stop the podcast here if you want to go listen to that before coming on; I don’t want to ruin it for you. But as Dan kind of alluded to, Costco did come out on top of that bracket.
So, it’s needless to say the eight companies that we have today are definitely going up against a fair amount of stiff competition. But what I like about the eight that we have on our list today — and we’ll get to reading those off for you — but what I like about these eight is that they’re really unique, niche companies. It’s hard for competitors to do exactly what any of the companies on our list today are doing.
So, without any further ado: Dan, maybe do you want to just broadly introduce our listeners to the eight companies we’ll be talking about?
Kline: Yes. So, in our No. 1 seed is Five Below (NASDAQ:FIVE), we’ll be facing off with No. 8 seed Tiffany & Co. (NYSE:TIF) I will point out, in the last round, we had a No. 8 upset a No. 1. No. 5, Lululemon (NASDAQ:LULU) , will match up with Tractor Supply Company (NASDAQ:TSCO) — two companies that do not get grouped together all that often. No. 3 and Emily Flippen favorite Ulta Beauty (NASDAQ:ULTA) will be taking on Zumiez (NASDAQ:ZUMZ), a favorite of my son’s and a store I was in over the weekend. No. 7 will be DSW (NYSE:DBI), a favorite of my wife’s, a designer shoe warehouse — they own a lot of other brands, I learned today — against Ollie’s Bargain Outlet (NASDAQ:OLLI), a favorite of mine. We are set up for quite the battle here.
Flippen: [laughs] Yes. And again, as always, I am the one who likely very incorrectly seeded these. Don’t read too much into the seeds, our listeners out there — I really did purposely seed them in a way that would put some interesting companies up against each other. So, the first grouping we have here. Oh, and if you are new joining us, we’re actually taping this in front of a live audience. So, if Dan and I disagree about which company out of the seed should move forward, we’re actually going to poll the people who are listening live to act as sort of a tiebreaker to see what company we should pull forward. So, that’s kind of my favorite part about doing these bracket showdowns, is adding that listener incorporation, if you will.
So, with that being said. Now, let’s roll into our first, I guess, versus here, which is Five Below versus Tiffany. Dan, how do you feel?
Kline: Well, Emily, let me lay out the case for Five Below here. Five Below is a company that sells things mostly under $5. They have a small section that’s higher than that. But generally, you walk in with $5, and you could buy a yoga mat for $3, a weird candy for $2. They have a really interesting selection of electronics, cheap headphones, soda coolers that have what you’d expect — like, “Wait a minute, I don’t remember that flavor of Red Bull.” It’s a really odd mix of stuff. And it’s shopping as entertainment. You might go in being like, “Hey, I’m going to the movies, I want to buy some Junior Mints and get them at a good price.” But you might also just go in and like, “I’ll take my son, and be like, why? I know I’m going to get out of here for less than $10 and he’ll have a bunch of things he likes.” Obviously, a business that has largely been closed, not in a great position right now, but one that I think is going to be one of the major retail success stories going forward. And that is not something I think of for Tiffany & Co. Emily, do you want to play up Tiffany, make the case a little bit here?
Flippen: [laughs] Yeah, I knew you were going to choose Five Below. And I will say that I know that we’re going to disagree here. And I know I’m working on an uphill battle against Five Below. Five Below is a great company. The biggest issue I have with Five Below is the fact that their name is Five Below, because whenever I first saw a store, having never been in one, I assumed it was like a winter outlet for snowshoes or something; the name is just —
Kline: Yeah, I will cede you that point. Also, I worry, when you name your store Five Below, and while they’ve set up the precedent that they’ll sell, like, really good value, like a $40 puzzle for $8, they can’t really deviate from that. And it’s always concerned me with dollar stores. Like, the prices of things go up and you’re still called, like, Dollar Land, [laughs] that’s just a little bit tricky. So, I do think that is kind of a negative, but they’ve shown an ability to pivot away from that. And I did think the same thing the first time I saw one — I lived in the Northeast, so that type of store would make a lot more sense.
Flippen: Yes. So, I guess the name, and as you mentioned, their inevitable fight against inflation, [laughs] there aren’t that many issues with Five Below. But what I think is really interesting about Tiffany’s is that, you know, Tiffany’s as a brand has always been there. As a company, it’s been consistently overlooked, and it’s largely been because it’s been such a poor investment. So, just looking at Tiffany’s recently, I mean, they’ve been hit by the trade war between China and the U.S., a lot of their sales are from tourists. And the fact is that tourists weren’t looking to buy expensive jewelry and weren’t coming, a lot of times, when it comes down to the trade war. And then that lack of tourism has also been exacerbated by the presence of COVID, which is probably going to continue to significantly impact them.
But they are in the process of potentially being acquired by Louis Vuitton, the ticker is LVMUY. It’s traded over-the-counter here in the U.S. They have lots of different brands; Louis Vuitton is the big one.
So, while Tiffany’s has been struggling, the parent company of Louis Vuitton has actually been doing really well. And so, when I think about potentially buying a company like Tiffany’s — and maybe a better company to have put in this bracket would have been Louis Vuitton or something along those lines, because those companies have been doing really well. It’s actually a pretty stalwart business with steady 10% to 15% top-line growth, strong free cash flow — not as great as Five Below, I will cede that point, not as great as Five Below — but it’s a strong business that I think gets overlooked a lot of times.
And when I see the presence of a lot of designer retailers now coming out — TheRealReal, for instance, you know, even companies like thredUP, which sell designer brands — it makes you think that the demand for designer clothes is still there, they just need to innovate in how they sell.
Kline: I don’t think the demand for designer clothes is going to be what it was for quite a while. [laughs] And I love this matchup, I absolutely do. Putting a successful company that owns designer brands and giving them a name like Tiffany’s, that’s absolutely great, but that said, I think it’s going to be a long time before someone buying jewelry is willing to pay a premium to just have it in a Tiffany’s box when they could go buy it someplace else. They are renegotiating that purchase, they’re trying to pay a lower price and not back out of the deal, they’re still pretty clear they want to make the deal, but they want to lower the price. That may happen, but sometimes that leads to a deal falling apart. And I don’t like Tiffany’s as a stand-alone company, you know. In this case again, these companies are really hard to compare. You can get a Ring Pop at Five Below and a diamond ring at Tiffany.
Flippen: [laughs] Kyle, our Producer for the day, had just stuck up a poll for our live audience. Dan thinks that Five Below should move forward in the bracket. I think that Tiffany does. And as we’re seeing the votes come in live, I think we’re realizing that as expected, Dan, you might take it home, Five Below looks like it is going to be our winner in this bracket.
Kline: This was a one versus eight matchup. So, I will say, this is like North Appalachian state putting up a pretty good game against Duke. Like, they only lost by 8-12 points. You know, if you bet on them, you’d have covered. So, this was a closer matchup than I would have expected.
Flippen: Yes. [laughs] That being said. Now, let’s move on to our next matchup, which is Lululemon versus Tractor Supply Company. And as you saw with Five Below and Tiffany’s, this is also [laughs] a really interesting matchup. Maybe the core demographic that shops at Lululemon is not the same core demographic that is shopping at Tractor Supply Company, but both of these businesses have been really strong investments.
Kline: So, I like both of these companies. I didn’t know as much about Tractor Supply Company, I used to drive by one when I worked in Manchester, Connecticut; ran the toy store. So, I was sort of familiar with what they look like from the outside, but they’re a farming supply company. And that’s a really broad way to say it, but they tend to be in rural communities; they have a captive audience, it’s a fixed audience. The reason I’m going to edge toward them here is that Lululemon, while I like it — while they’ve shown they can make a superior product, they’ve even shown that they could bring in some male customers, though, I question exactly how big that can get — I do think there is a bit of a risk of Target making high-quality yoga pants and people at some point just not caring as much about brand name. You know, we’ve seen it with some of these brand names that come in and out of fashion. And, yep, you’re going to buy Lululemon because it’s a really nice pair of yoga pants, but if it’s $90 and the Target one is $25 and there’s no longer as much cachet as wearing Lululemon, you might switch. That’s kind of my thought, Emily.
Flippen: I can understand that argument, but we’re going to disagree again. And our live audience is going to love it, because it means that they get to vote. But the reason why Lululemon has the edge to me here is because Lululemon has been a very strong performer historically, right? The core demographic for Lululemon has continued to shop at Lululemon for all of their needs, and actually spent more on average year over year. And, yes, athleisure is definitely competitive, but the thing I like about Lululemon is that they tend to be both premium and approachable at the same time. So, the price that you pay at Lululemon, they don’t worry about getting undercut by Target. Target is always going to have cheaper sweatpants than Lululemon. Lululemon is not trying to be the affordable, cheap brand. They’re trying to be a premium brand, but they’re priced just high enough to be premium, but just low enough to be reachable and approachable for the vast majority of their demographic. So, I like that aspect of Lululemon, I think they do a good job at targeting their corner markets, and they have no long-term debt, they’re in a really stalwart financial position right now. They stayed profitable even during COVID this last quarter, with “limited markdown risk from their inventory.” So, both of these businesses are really strong businesses, but I do think my vote goes to Lululemon, but I know yours goes to the Tractor Supply.
Kline: Yeah, and very hesitatingly, because there is a 4-5 matchup, so both of these companies would be ranked pretty close to each other, but I do think Tractor Supply serves an audience that, it would be very hard to compete with them. And there’s a lot of athleisure brands, you know: there’s the Kate Hudson one, the Gap has one. Everybody kind of has one. I will say, when I did yoga regularly — and this was a few years ago, at a pretty upscale yoga studio — Lululemon had a pretty stunning market share of upscale yoga pants.
Flippen: And I’m watching the votes come in from our live audience right now. And this is a nail-biter, Dan —
Kline: — this is the closest, we had a tie yesterday on the rundown, which is the first time that’s ever happened. How long do these polls stay up for, Emily; what’s the rule there?
Flippen: [laughs] Until it’s no longer a tie, is my mindset. Now, I think we should call it here. Dan, you did pull out and edge here for Tractor Supply Company. Let’s be clear, the difference is only a couple of votes here. And for a period where you were talking, they were tied. I think it’s fair to say that both of these companies are strong companies and I intended when I made this bracket and we do this podcast, it’s intended to be a competitive bracket, right? We don’t want to have any hands-down poorly run companies. And this is a great testament to that fact. But, darn it! I lose.
And our next matchup, we have Ulta Beauty versus Zumiez. I think I pronounce Zumiez correctly, although its spelling is a little bit confusing to me.
Kline: [laughs] I believe so.
Flippen: [laughs] Great. Again, I want to say these two companies are — well, no, they’re probably very different companies. And I think about the person buying makeup at an Ulta Beauty salon. Going to their salon, buying makeup at their store versus maybe the skater, surfer, snowboarder, who is buying very trendy items at a Zumiez. Dan, what are your thoughts?
Kline: Yeah. So, I don’t think we’re going to disagree on this. I think Ulta Beauty is a widespread business that just has a bigger total addressable market; it also doesn’t depend on trends. I was in a Zumiez over the weekend. And it may cater to the snowboarder and the skateboarder, but it seems to cater to the wannabe. And there was a big pile of Thrasher shirts, which I think were popular, like, 18 months ago, where you’re not a skater but for some reason you’re wearing a skateboard magazine t-shirt; my son had one. My son actually bought a shirt there and it looked very trendy. It was a bomb with a smiley face on it; I’m sure it means something that I’m not understanding. It feels to me like a company that could fall very much victim to fashion of the moment and might not be able to pivot. I don’t think this one’s even close. I think Ulta Beauty is really a foundational company that’s going to be around for a very long time. I don’t think people are going to stop wearing makeup; in fact, I think more people may start wearing makeup, especially as it becomes affordable and maybe less gender-specific. Men are a little more concerned with appearance than perhaps they have been at other times in history. So, I really like Ulta Beauty. And frankly, I think Ulta Beauty could win it all here.
Flippen: Wow! That’s a bold statement for Ulta Beauty. I am also a fan of Ulta Beauty for all the reasons you just said, plus the fact that it’s kind of an experience. The Ulta Beauty salons themselves keep people driving into their stores and while they haven’t done that wonderfully during this pandemic, clearly, I do think to your point, makeup and salons are going to be things that come back “into fashion” as we come out of this pandemic. So, Ulta Beauty will also get my vote. But I don’t want to gloss over Zumiez, because when I added Zumiez to this poll, I was a little bit hopeful that maybe you would be a fan of it and we can debate this, but I’ll make the bold case for Zumiez.
Kline: We’ll have my son on next time.
Flippen: [laughs] Great. I was laughing to myself when you said you were in Zumiez this past weekend, because my bear case for Zumiez was: When was the last time anybody was in a Zumiez? [laughs]
Kline: I was the only person in there, and I bought a mask that didn’t turn out to fit all that well and my son got a t-shirt. There were lines, so we went to a Simon outlet mall and it was very well done — the line to get into Nike was 40 minutes and it was incredibly well managed and there were distance markers, everything done. The line to get into Zumiez was no line. So, that also tells you a little something about their business.
Flippen: Yeah, and that being said, just from a financial perspective, I have never been in a Zumiez myself, so I can’t speak to the retail experience so much. But I feel like it might be an underrated company, a consistent performer, which is surprising given it’s a company that is so driven by trends. They’ve had consistently double-digit free cash flow margins, which is the metric that I mention a lot, but I generally use to gauge financial performance. The more cash a company can generate, generally in my opinion, the better investment it ends up becoming. So, the fact that they’ve managed to generate double-digit free cash flow margins is particularly impressive.
But their CEO still owns 10% of the company and it’s trading at a really reasonable valuation in comparison even to a company like Ulta, which has fallen significantly, but has always kind of derived a premium for the fact that they’ve always had really strong relationships with their customer. So, yeah, I mean ultimately my vote does go to Ulta, but it is an interesting conversation.
Kline: And, Emily, let me jump in. Their core product is $30 t-shirts. That’s a really expensive t-shirt. That is a heck of a margin. Now, a lot of them are licensed and brand names, so there’s definitely some costs there, but they are selling a premium version of a pretty inexpensive product to make.
Flippen: And our last matchup here is maybe probably the clearest one, I think, for both of us. This is going to be Designer Brands, the parent of DSW, going up against all these bargain outlets. I don’t even know how to describe Ollie’s, Dan. [laughs]
Kline: So, Ollie’s is like if a Big Lots was well-run. And I don’t mean the company, I mean, Big Lots has an enormous amount of space; it’s not merchandised well. You walk into an Ollie’s, it’s about a third the size and it has that, you know, selection of — you don’t know if you’re going to find K-Cups or Instapots or maybe it’ll be a model train set, but it’ll have the Green Bay Packers logo on it. It is a really strange, like, treasure hunt. You don’t know what you’re going to find. And it’s a fun shopping experience, but it’s in a condensed space and it’s basically merchandised floor to ceiling. It’s also really clean for that type of store. And by clean I don’t mean not dirty, I mean just everything in its place, really well put together, and it gives you a tremendous bargain, so you get that value of like, “Okay, I need a coffeemaker, but I don’t really care what coffeemaker. I just want something that makes coffee.” And you go, and you’re like, “Okay, there’s a purple coffeemaker that’s $14 as opposed to the regular coffeemaker I want that at Target that would be $35. I’ll buy the purple one, I’ll get that deal, I don’t care what color my coffeemaker is.” There’s tremendous fun in shopping at Ollie’s, it has a bit of that Costco, you don’t know what you’re going to get a treasure hunt feeling. And then it also has a very loyal customer base. I’ll make a case for DSW, if you want, but I’m a big, big fan of Ollie’s.
Flippen: Yeah. I am almost not even sure if we need to make a case for DSW. I’d be impressed if you could make a case for me, it’s one of those retailers I just don’t see surviving.
Kline: So, I’ll make a case. This is a company that’s absolutely going to survive, unless the pandemic created some — you know, obviously, they were closed. And they have very big stores, so they are otherwise pretty healthy companies, I don’t know their debt picture. I glanced at their financials, they looked good, but they report the 18, so we don’t know what their current financial state is. My wife loves DSW, and she’s not a giant clothes or shoes person, but she’s always looking for that, like, right pair of work shoes. So, pretty much anytime we go to Whole Foods, she stops at DSW, which is a couple of doors down.
I think shoes are something, for a long time, people are still going to want to try on. I know that even though I know my size in Nike versus, say, New Balance, I’m not buying shoes online unless I absolutely have to. Shoes fit differently, especially when you get into dress shoes and work shoes and other things. The bargain hunt aspect of walking into a DSW, which is a pretty massive store, which I think is kind of a negative, but you walk into a DSW and you could try on, like, 50 pairs of shoes and it’s a constantly changing inventory; and they might have something that’s a tremendous deal, they might have something that’s just always a good low price. It’s a good shopping experience. I think it has a very loyal customer base and I think shoes are the most resilient part of retail in terms of we’re going to want to try them on.
That said, Ollie’s might have shoes at any given time too, and really, I think the Ollie’s overall business model of that treasure-hunt aspect is a good business model in general, and it’s executed incredibly well in its stores, which are generally in less expensive retail locations — they’re condensed compared to their competitors, it’s a heavy turnover of merchandise so you could go two or three days apart and see some different stuff. So, again, I’m really curious to see Ollie’s and Ulta, because I don’t know my answer on that one.
Flippen: [laughs] Well, let’s move Ollie’s forward then, and we will revisit the Ollie’s versus Ulta next round after we do our first contenders, which is the No. 1 seed Five Below versus No. 4 seed Tractor Supply Company. I think I can guess where your vote is going to go, Dan.
Kline: Yeah, I’m going to go with Five Below, but that may not be fair. Tractor Supply is just a business I don’t understand all that much, because, you know, I’ve never been a farmer, I don’t need — they have a really strong recurring business, you have to buy feed, you have to buy tractor parts, you have to buy — I’m not entirely sure what their store [laughs] sell, but they’re all things that their customers need. Whereas Five Below, I don’t actually need to buy anything there, like, my son could get headphones when we’re at Target. We could buy, you know, Japanese soda when we’re at, I don’t know, Epcot. Like, nothing there is absolutely essential. That said, Five Below has done a really good job of putting their stores in second-tier retail plazas. They’re like ones you go to anyway, but they’re not the most expensive. They have a lot of ability to have stores, a high density of stores, because you’re probably not going to travel for a Five Below, but if there is one there, you’re probably going to go in. So, I think this is actually closer than I’m making it out to be. Emily, can you make a case for Tractor Supply?
Flippen: I can. And I think I will vote for Tractor Supply in this showdown. There’s a lot of things that I like about Five Below that we mentioned during the first showdown between Five Below and Tiffany’s; here I’m going to be making a bear case for Five Below. Five Below has had declining same-store or sales per square foot, which is a metric that’s good to use for big retailers like Five Below. That’s been declining since 2017 — not a ton, but it used to be around $240, $245 a few years ago and it’s fallen out about $235. So, the stores that they are opening just aren’t generating as much money per square foot as their existing stores were.
And their growth expansion is totally dependent upon them building out new stores, which is fine; I just don’t know how many Five Below’s we really need in the U.S. right now. So, they’re at a stalwart financial position, it’s hard for me to break down their financial position, but the reason why I like Tractor Supply Company better is because before this pandemic, Tractor Supply was actually guiding for about 5% comps. So, that’s comparable store sales, about 5% raise before the pandemic hit. For Five Below, it was just under 3%.
So, the 5% versus 3% says to me that the people who are shopping at Tractor Supply Company, these are the people for their rural lifestyle needs [laughs] — read into that how you will — these are people that are loyal customers. And they have a really strong loyalty program in their Neighbor’s Club as well as the fact that they also have a pretty strong financial position, a little bit more debt than Five Below does. But I see it as a more essential retailer versus a Five Below. I feel like the Tractor Supply Company that exists today will probably continue to post pretty strong comparable same-store sales, whereas Five Below is really going to struggle to keep up their sales per square foot.
Kline: I will point out, Emily, that there are two Five Belows here in West Palm Beach, and when I’m at my other house in Davenport, there are two within five miles of each other. So, you are right [laughs] that they might be building too many stores too close. And you won in a landslide, this is —
Flippen: [laughs] Yeah, our live audience did, 84% agreed that Tractor Supply Company should move forward. I’ll tell you what, I’m a little shocked by that, I feel like Tractor Supply, we never talk about it.
Kline: I actually feel like that’s one of those companies we should probably devote a show to, because we’ve been asked about it a lot and it’s probably worth spending the time to dig in. I will also say, 2% said we’re both wrong, which is really difficult when there’s two companies and we’re each taking one.
Flippen: Two percent don’t like retail companies in general. [laughs] And who could blame them. And now, you know the moment you’ve been waiting for, Dan: Ulta versus Ollie’s. Do you want me to go first while you think about it? I don’t know where you’re going to land on this one.
Kline: I haven’t decided, so why don’t you go first?
Flippen: Oh, interesting. I’m going to make the argument for Ulta Beauty over Ollie’s. And Ulta Beauty, to me, just has more opportunity in front of it. They have a historically strong business, yes, but the opportunity they have to deepen relationships with customers through their loyalty program and through driving e-commerce sales, to me, is an opportunity that’s being undervalued in the market today. I think makeup — especially something that is as trendy and fluid as makeup is — is a huge opportunity for them long-term. Makeup is one of those things that comes in to and out of fashion pretty quickly. And so, having distribution through Ulta stores allows makeup producers, and oftentimes influencers and stuff who make their own lines, to get exposure to large numbers of people.
That makes their business at Ulta pretty important, versus Ollie’s Bargain. Like, the thing that I dislike about it is the fact that they’ve had pretty steadily declining revenue growth. It’s nearly $1.5 billion in sales — which is great, it’s a large company — but it’s just a really low-margin business that isn’t growing a lot. They also have their own loyalty program, but I see less opportunity in their loyalty program in leveraging those relationships than I see with Ulta. So, I like Ollie’s, I like Ulta, but to me, Ulta gets the edge.
Kline: I can’t believe I’m saying this, but the problem with Ollie’s is that when times are good, there’s less need for them. I’m not saying it’s not still fun to shop at Ollie’s, but you might not want to buy the really cheap pair of gloves just because you need gloves, you might want to actually buy the gloves you want. And the same could kind of be said — I’ve bought gloves at Ollie’s, [laughs] that’s why I’m mentioning that — but I do think Ollie’s has a little bit of risk that if the economy improves, they’re going to lose some of their customer base. I think Ulta Beauty, everyone likes a bargain when they know they’re getting top-quality stuff, there’s no sacrifice made to shop at Ulta. It’s sort of positioned as a premium brand at sub-premium prices or at fair prices. I think that’s more essential.
I also think, and we’ve seen this during the pandemic, that people are going to let a lot of things go, but they’re going to worry about their appearance as long as they possibly can. The first thing a lot of people did, myself included, was get a haircut. Now, I did it because I was starting to look like a wizard. But you know, people who were running out of makeup, they were ordering online, they were still purchasing from Ulta.
So, I like Ollie’s as a customer more, but as an investable business, I’m going to agree with you and say it’s Ulta Beauty here.
Flippen: Awesome! And I agree. You know, during the pandemic maybe there’s less need for makeup. I know anybody who’s watching me talk right now is aware of the fact I’m not wearing any makeup, but I have ordered from Ulta to keep my makeup supplies in store for the occasional time that I do need to put it on. So, yeah, it’s a business that, in my opinion, is a little bit more necessary than an Ollie’s Bargain Outlet.
Kline: Emily, if I had known pre-pandemic that we were going to be broadcasting, however many hours a day you and I are broadcasting most days, I would have absolutely invested in figuring out what makeup would look flattering for —
Flippen: [laughs] It’s never too late.
Kline: Well, I think in general, when you’re on television — and I’ve been lucky enough to do some actual television appearances — the first thing they do is come out and put on makeup, so you don’t look shiny, so the lights don’t reflect off of you. I would have bought glasses that have the nonreflective glare, so you don’t see my ring light in them. But I do think, as more of us are doing [laughs] Zoom meetings, you’re going to see a bigger audience maybe looking for that type of thing. And previously, I don’t think I would’ve walked into an Ulta and asked about makeup.
Flippen: [laughs] And with that, there are only two left. Tractor Supply Company versus Ulta Beauty. I like both these companies, but I think I know where my vote lies.
Kline: I’ll let you go first because I could argue either side, I think.
Flippen: So, my vote is actually going to go toward Ulta Beauty. I’ve given out a lot of reasons why I like Ulta. Let me say something I don’t like about Tractor Supply Company right now. It’s had a great short-term boon because of the number of people that have purchased RVs or other camping-style equipment to go out and live their new rural lifestyles [laughs] during a pandemic. And there is value in the fact that they may gain some more permanent customers as a result of this pandemic. But at the same time, I have to think that this is probably going to be a short-term boon for them. I wonder if the lifestyles that people are taking up — whether that be for vacations or travel or even just what they’re doing for entertainment right now — I would have to wonder if they keep those things up once we’re free to move about. You know, move out the cabin, as they say.
I have to think that it’s now hitting — I mean, the last I looked at it, it was hitting 52-week record highs for the company. So, it’s not cheap, it’s a $14 billion business. Would I value a tractor — no, it’s not a tractor company, to be clear, it’s a rural lifestyle retailer — would I value a rural lifestyle retailer at $14 billion? That’s hard.
And it’s been an OK grower, it’s been in a stalwart financial position, but do they grow their top line the same way they have over the past few quarters for the next few years? That’s where I can’t say yes, versus when I look at a company like Ulta Beauty and the investments that they’ve made into their omnichannel experience, their delivery, the connections they have with the people, that’s a business that I can believe in.
And to me, it has always looked relatively attractive in terms of valuation. And you know an argument is closed though when it comes on to valuation for me, because I put very, very little emphasis on that typically.
Kline: It’s a really tough position, because Tractor Supply is a mature company; they don’t have as much growth runway. I do believe you’re going to see an ongoing trend of people wanting to travel via RV, I think that’s something a lot of people wanted to do and this gave them permission. I will tell you, I have looked at the used RV market, and before this, it was absolutely depressed. You could have picked up a viable RV for $2,000 or $3,000; now you cannot find a viable RV for anything less than $10,000, $12,000. And there’s a lot of people down here in Florida who own RVs that previously had been selling them.
But that said, I think there’s more upside for Ulta. I do think Ulta Beauty is a relatively young company that has a really strong model. I also think there’s some real strong ability to add things like hairstyling and doing makeup for events and there’s a lot that Ulta could do. There’s digital technology that eventually could make Ulta a stronger player online. So, I think these are both great companies. Tractor Supply is a really steady bet, but Ulta Beauty has more upside.
Flippen: Well, you predicted it when you first said that you thought Ulta could take it all the way: Ulta has taken it all the way. But it’s worth noting this is only one-half of the bracket that we did, obviously, in connection with the other half we did, maybe last month. Is it fair to put Ulta Beauty up against last month’s winner, Costco?
Kline: I don’t think it’s fair. [laughs] I think, look, this is, “Could the college champion beat the NFL champion?” And the answer is “No.” Ulta Beauty is, when you get down to it — it’s a big niche, but it’s still a niche player, whereas Costco is a very broad retailer. I mean, look, Costco has an eyeglasses department, they have a hearing aid department, they have a travel agency. Ulta Beauty does makeup. And I think they could do other things, but they’re probably not going to start a butcher shop. Like, there’s just a level to — Costco also, I don’t think you can get past the predictability of their revenue; the slow, plodding, steady growth.
I’ll make one argument for Ulta. There is more short-term stock upside to Ulta than there is to Costco, because Costco has been steady through the pandemic, it’s trading at or near 52-week highs — I haven’t looked at it today. And Ulta, which had a down period in closing its doors, I think it’s going to have a whipsaw of a comeback when they report their next results. Whatever period is post-opening, I think those numbers are probably going to be fairly astounding, because people needed stuff and they didn’t necessarily want to buy it without seeing it. So, I do think if you’re looking at maybe stock prices over the next year or two, you may see more growth in Ulta.
Flippen: I generally agree with that sentiment. You know, Costco has been a steady performer. Ulta is a riskier bet, its business model is, in my opinion, still disrupt-able, versus you’re not going to disrupt a Costco, there’s no disrupting Costco’s business model. But I agree, Costco is probably not going to face as much upside or as much downside as Ulta Beauty over the next couple of years.
I like both of these companies. I’m pretty happy with our first-ever Fool retail bracket here.
Kline: I’m happy about it, I’m looking forward to the next six months when we do a restaurant bracket as we figure out what [laughs] restaurants are left, because there’s a lot of —
Flippen: — it might be a very small bracket.
Kline: Oh! I sent Chris Hill a note earlier today about the state of restaurants. And any mid-level chain, oh, boy! The news is not good.
Flippen: Well, Dan, thank you so much for joining me again today in Industry Focus to go through this bracket. It’s been a pleasure.
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Kline: Thanks for having me.
Flippen: And I also want to give a special thanks to all of our podcast listeners for listening to us, but also to the people who are listening live. Thank you for participating. Thank you for voting. It’s great when we have a tiebreaker between Dan and I.
But, listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out, you can always shoot us an email at [email protected] or tweet us @MFIndustryFocus.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear.
Austin Morgan is working on another project today, so thank you to Kyle Carruthers for his work behind the screen. For Dan Kline, I’m Emily Flippen, thanks for listening and Fool on!
Daniel B. Kline has no position in any of the stocks mentioned. Emily Flippen owns shares of Home Depot and Ulta Beauty. The Motley Fool owns shares of and recommends Home Depot, Lululemon Athletica, Nike, Ollie’s Bargain Outlet Holdings, Tractor Supply, Ulta Beauty, Wayfair, and Zoom Video Communications. The Motley Fool recommends Costco Wholesale, Designer Brands Inc., Five Below, and The TJX Companies and recommends the following options: long January 2021 $120 calls on Home Depot, long January 2022 $115 calls on Five Below, short January 2022 $120 call
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