Surprise Winners of Lockdown

In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline discuss about some surprise winners emerging from the current lockdown situation. There are beverages, fast food, convenience/grocery/electric retailers, etc. Discover the reasons they are able to make it in this environment and much more.

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This video was recorded on April 14, 2020.

Emily Flippen: Welcome to Industry Focus. It's Tuesday, April 14, and I'm your host, Emily Flippen. I can hear the cheering from the audience already, because today I am once again joined by Dan Kline. [laughs] Hey, Dan.

Dan Kline: I appreciate that. If the Fool audience isn't sick of me yet, I promise you, I will get there. That is the goal. How are you holding up, Emily?

Flippen: I'm barely holding up, to be honest. Again, my cat and I've had a ton of quality bonding time over the past few weeks. But before the show started, you and our producer, Austin, were talking about exercise and trying to get on running. And I'll tell you one thing, my Fitbit said I walked an astounding 800 steps yesterday. So I'm not sure if you can beat me there.

Kline: Well, my Fitbit gave me the 10,000 thing yesterday. And I maybe walked to 600 steps, but while we're doing Motley Fool Live or Fool TV or whatever we're calling it right now, I wave my arms a lot, and apparently that counts as a step. So I'm getting a lot of aerobic upper-body exercise. My cat -- I have two, but one of them is sort of more pillow than cat, and she has gotten very aggressive with the lap-sitting. So at three, four o'clock in the afternoon, she would just come and sit right in between me and my laptop and somehow weighs like 200 pounds. She just can do that thing little kids do where every part of her goes limp and you can't move her in any way. So I'm taking that as my sign, OK, that's when I have to put the laptop down, pet her for a few minutes, you know, relax a little bit. Which is probably good advice, because as you know, one day has bled into another. And I am not entirely sure, if we weren't doing these shows, I would not know what day it is.

Flippen: Well, luckily, I can tell you, and all of our listeners, that it is in fact Tuesday, which is your Consumer Goods episode of Industry Focus. And, Dan, last time I had you on, you know, we talked a lot about retail companies and how they're succeeding, you know, companies that have really built out omnichannel presences. But you came to me with an interesting take on the topic that we had, kind of, covered before, but it's the surprise winners of the coronavirus. The companies that you wouldn't think have succeeded in this environment but have pulled through.

Kline: Yeah, absolutely. And maybe just companies that when you think about it, it makes total sense, but they probably weren't the first ones that came to your mind when this was happening. And I feel like maybe in a few weeks, we'll get to a show of just companies we dream about being able to visit again, [laughs] but that's probably less of a stock market-oriented show, maybe that's an Industry Focus After Dark episode.

Flippen: [laughs] I like that. So when you think about, as any surprise winners of the coronavirus situation, hopefully, some of them are stores that maybe you're excited about visiting. But the retail stores that have surprised you as an investor, what comes to mind?

Kline: Yeah. So let's start with one that was sort of right under my own nose, Dollar General. So Dollar General has an astounding 16,300 stores in the U.S. Not something I was ever really aware of, because when I lived in Connecticut, we had just gotten our first one near a college campus, which makes a lot of sense. And in Southern Florida, they don't have a large presence. In Central Florida, where we spend part of our time, they are everywhere.

And what I like about Dollar General is it's a value model, it's not a $1 store, they're sort of a combination convenience store/grocery store. You might be able to buy a towel, you might be able to buy an iPhone charger, you might be able to buy a pool noodle here in Central Florida. Very eclectic mix of merchandise that is obviously pivoted more toward household essentials and groceries, not a huge demand for pool noodles at the moment.

But why Dollar General is essential is, they tend to serve neighborhoods, people that don't necessarily have the transportation or the ability to get to traditional grocery chains. So they've always been sort of an essential-needs company, and now they're filling an even more vital role.

Flippen: So I have to admit, when I think about companies like Dollar General, I have a pretty negative impression for exactly that reason. They tend to take advantage of communities that have less access to larger retailers like a Target, like a Walmart, or Costco.

Kline: Yes. So I'll tell you what I didn't like about Dollar General and what I do like. What I don't like is their stores tend to be chaotic. There's usually only one, at most two people working, at least visibly. And I've only visited a few of them, but there are some near me in the Orlando area. And the shelves are not all that organized. The displays are not well done. These are kind of chaotic stores. I don't love that.

What I do like is that they are in markets where they could be, I don't want to say price gouging, but offering really inferior products, even if they're at low prices, and they really don't. They have really good products. They sometimes have name-brand products at very good prices, but maybe it's like a Starbucks can of coffee, that you're like, "I don't remember when they had that flavor," maybe it didn't do as well at grocery. Certainly, they have their off-brand sodas, there's Dr. Topper [laughs] is the one my son always laughs at.

There's all sorts of merchandise, but right now, when a lot of us -- we're lucky, you and I are lucky, we have the money available to either order from a store or go to a store and buy two weeks' worth of toilet paper. Even the Walmart is telling you not to do that, to shop one week at a time if you can. But we have the ability to buy our favorites in whatever quantities we want to.

A lot of people served by Dollar General are living a harder, more hand-to-mouth existence. So it's one thing to say, limit how often you go to a store and buy a week or two weeks' or whatever it is, but people who are working and are paycheck to paycheck, they might only be able to go in and buy what they're going to eat for the next couple of days. And Dollar General has canned goods, they have soup, they have fresh stuff in some areas, they certainly have some things to do, like, decks of cards and maybe some basic games. It's a business I really like.

It's also one that as an investor, when you look at them, when they report, people tend to be pretty negative when their same-store sales do not increase. Their metric isn't really same-store sales, it's how many new stores they're opening and plan to open, because basically what happens is Dollar General serves whatever it is, a one- to three-mile radius primarily around the store. And it goes from 0 to 1.5 million or whatever the number is per year, and then it kind of stays there. Its only additions would be when they can find interesting merchandise and ways to get people to make bigger sales. So that's a metric. I understand why you're looking at same-store sales for a restaurant, for a slow-growing chain. For Dollar General it's all about opening a thousand stores a year, which they've consistently done.

That might slow down this year, obviously. Construction has slowed or stopped in some places. But long term, you know, this was a company that had a lot to like about it, that a lot more people are aware of. And Dollar General stores are nice enough that, you know, it's not that sort of grungy dollar store where the person who shops at a Kroger or Wegmans or a nicer store doesn't want to go into. Dollar General is a perfectly viable place, like, if it's convenient on your way home, stop in and grab a few things. And I think more people are going to do that after the coronavirus. And it would not shock me if they have higher sales due to coronavirus.

Flippen: And it's not just the low-price brands like Dollar General or Dollar Tree that are succeeding, it's also premium products, right? You think about people who are maybe -- you know, we talked previously about Starbucks, you mentioned you're not going to go out and buy a coffee for every single coffee that you missed, but certainly people miss Starbucks.

Kline: [laughs] People miss Starbucks. And Starbucks came out and said -- first of all, they're about 95% reopened in China. It doesn't mean that dining rooms are open, but stores that were closed, they are now open. And that is very heartening as an American going, "When can I get to normal?"

Now, I am very lucky that I live in a Starbucks-dense area [where there] are all newer Starbucks, so they all have drive-thrus. So I know that this weekend, I went to Starbucks, I waited both days, it was an average of about 35 minutes. I bought a couple of coffees, maybe a Rice Krispie treat; though you're legally not allowed to call them Rice Krispie treats, a crispy marshmallow block or [laughs] whatever you're supposed to call it. And they were crowded.

And Starbucks came out and said, "Hey, look, we are not going to do as well as we said we would do." So they pulled their earlier guidance. "But we are still going to be profitable." So if you look at a company that -- we've talked about this before, I believe Starbucks is going to snap back to normal, probably even do a little bit better in the immediate, because people are going to feel really able to indulge the first time they can go sit in a Starbucks. But they're going to whether this is still profitable. That means they don't have to dial back spending; they don't have to change any of their plans. It doesn't mean they're not going to do things, like, slow down on share repurchasing and other things. In fact, I think they're not doing share repurchasing at the moment. But it is a really good sign that people are willing to wait in line for quite a while to still support a brand that's not essential. I love coffee, but it's not essential.

Flippen: What is essential to you when you think about, you know, Starbucks coffee is not essential, but what have you been maybe purchasing more of that you didn't expect yourself to be purchasing more of if you had rewinded three months ago?

Kline: [laughs] So alcohol might be. And it's a funny thing, because I wouldn't say I'm using more alcohol. I would say I've improved my liquor cabinet. Because definitely with the amount we're working; obviously, some people have nothing to do, every day is Saturday. Perhaps they're drinking more beer. TV commercials would suggest that every company you've ever heard of has a line of hard seltzers coming out. Feels to me that there might be a little market oversaturation there. I don't know that we need 17 different brands of hard seltzer. But yeah, I think some of those companies are going to benefit.

You mentioned Constellation Brands. I'm not sure what the winners will be, but I know that I've tried some bourbons and scotches and more expensive things that I wouldn't normally buy. So I think you might find some winners there. I think a really big winner is Domino's. And this is one, we've talked about this a lot. I'm not a big fan of Domino's pizza. I like it better than Papa John's pizza, but that's sort of like saying, I like pneumonia a lot better than I like swine flu. Like, you know, these are both kind of poor products. But Domino's has never been about product, it's always been about execution, and more so than Papa John's, which I think for them, this is a short-term benefit that may get some people who were down on the brand to feel better about it. For Domino's, which has a technology-rich operation. They have an amazing app, your ability to track your pizza from the point you order it to the point they deliver it, has gone -- it now uses GPS. So literally you can see your pizza as it heads to you. So they've defeated the Noid. They have beaten back all expectations here. And they are capturing more customers in their ecosystem.

So after this, Domino's will have your credit card, Domino's will have your email address, and they're convenient, and they're showing you that they're convenient. I would guess pizza consumption is up quite a bit, because pizza is inexpensive and easy to get. Not every pizza restaurant is open, some were not set up for full delivery or all these sort of new ways, some just don't make any sense for curbside pickup based on where they are, and they weren't on the delivery apps and they didn't want to give it a go. But Domino's never had a dining room. It was always set up for this and it's going to be a big, big winner in the long term by adding, whatever it is, a couple of million customers that it can now just send an email to and say "Hey, remember us? We were pretty good for you during the coronavirus, it's a Sunday, there's a football game on. Would you like some lousy pizza?" Though they probably won't use the word "lousy."

Flippen: [laughs] I'm not going to spend too much time on the fact that you said both Domino's and Papa John's were lousy pizzas. Both happen to be two of my favorite pizza places. [laughs] I really do, I really like the pizza.

Kline: Okay, Emily, the second this is over, I'm going to be driving up there or perhaps renting a private jet and flying you to New Haven, Connecticut, where we will drive around and go to the three or four different -- we'll go to Pepe's, we'll go to Modern, maybe one other, then we will drive over to Boston and go to Santarpio's, a famous local place in that area. And I will show you what actual pizza tastes like.

Flippen: As long as there's cheese in their crust, I'm never upset with pizza.

Kline: [laughs] Oh, I'm never upset; well, here's the thing, I'm not saying I'm not eating Domino's if it's in front of me, I'm just saying that almost every market has a better pizza. I would also say that almost every market also has a worse pizza. So it can be a bit challenging. And the one thing you do get from a Domino's or a Papa John's is consistency. Your pizza is going to be the same thing every time. That is certainly true of Pizza Hut, it's true of Little Caesars, not as true of some of the local pizza chains.

I know that, you know, there are some places where I grew up in Swampscott, Massachusetts, that I love, and there are a couple of places that I absolutely do not, but I cannot imagine any scenario where I would order from Domino's, there was no Papa John's, unless it was after 11 o'clock at night and Domino's was the only choice available.

Flippen: So let's talk about some of these vices in more depth. I've personally tried to put away the boxed wine during this pandemic, as to not put on the pandemic pounds, personally, [laughs] a lot of Ps there. But there are a lot of reports coming out that sales for, both, beer, alcohol, wine, even cannabis, all of these seem to be up. I mean, these are "essential businesses" in most states. And they are vices that people turn to when times are hard.

I know that Constellation Brands, which you mentioned makes Corona beer, and there were some hilarious reports initially out saying that sales of Corona had fallen as a result of the coronavirus, but their data says otherwise. Their data actually says that, "Hey, this might end up being a really great quarter," not just for them but for most of these alcohol and cannabis companies.

Kline: Yeah, and let's be very careful and I'll give the warning here. Just because you're home and have nothing to do and maybe aren't driving as much, don't become an alcoholic, don't drink to excess. That said, if you're home, you're watching a movie, you want to have a beer, it's OK, there's a lot of pleasures right now we don't get to have. And I know I'm a bit of a mixologist, I own a Keurig Drinkworks at the other house, which I don't have access to at the moment, it's about three hours away. And that makes mixed drinks from pods, and it's really a lot of fun. I know that Saturday night, signing off the air, I might sit down and mix myself a Manhattan and try to approximate some of the ones I've had in the Alexandria area near the office. I might see a friend put something online and try to get those ingredients. I think a lot of people are doing that.

Obviously, be really careful. It's very easy during this time period to give in to excess. I think we've all had a night where a pint of ice cream maybe didn't survive till morning, because there's a lot of anxiety right now. It's OK to have a glass of wine while you're walking slowly on the treadmill, you know, to offset those two things, if you happen to have a treadmill. Stay physically active, but yeah, these companies are going to do well, because they're comforting.

And I found it's not so much the drinking, I like looking and saying, "Oh, wow! I've got a pretty cool liquor cabinet, I could make this or that if I wanted to." It's probably why we all bought instant coffee to make the whipped instant coffee. I have the instant coffee, I haven't actually followed through [laughs] and made the whipped instant coffee, but we're looking for comfort, we're looking for ways to unwind a little bit.

And be careful; don't use it as a crutch. But letting go a little bit every now and then is probably a good idea, and I think a lot of Americans are doing that. And we're limited in how we can do it, so that is going to benefit alcohol companies.

Emily, cannabis companies, you could speak to a lot better than I can.

Flippen: Yeah, I threw those ones in there, because while I may not have much to say about Domino's and Papa John's beyond my own consumption, I do spend a lot of time looking at cannabis companies. I get their sales reports in my emails every week. And it seems like it could be stocking up the same way people seem to be stocking up on toilet paper, but in the states where recreational cannabis is legal and those businesses are still open, sales seem to be strong in the U.S. In Canada, it's a slightly different story, so it is interesting to see some of these businesses succeed while others may not. But while a lot of these businesses that are not essential businesses seem to be laying off employees, there are some cannabis companies that are hiring right now, because they're trying to meet the increase in demand.

And that's really counterintuitive for a lot of listeners, because the equity market for cannabis companies and honestly beer and wine companies as well as alcohol companies, they've been hit the same as the broader market has been hit, if not harder. So despite the fact that they're open, they're still doing business, arguably doing better business. They seem to be, yeah, hammered a little bit with the broader market.

Kline: Yeah. Well, I think we're going to have a round of earnings surprises. And some companies have, obviously, given guidance, but I think there are some that just don't know. And you might find that some of these alcohol brands, some of these cannabis brands report surprisingly robust numbers. I don't think where a stock is trading right now necessarily reflects the actual business of the company. There's a lot of uncertainty. I will say that there's a lot of effort by the cannabis companies.

I've mentioned to you, I live about half a mile from what has become a cannabis district here in West Palm Beach. There are four or five dispensaries on our, sort of, big downtown street. I'm on a lot of public mailing lists, city mailing lists, places they could probably get my email, and the amount of emails I get a day saying, "Hey, we can help you get your medical marijuana card." I'd seen, like, one or two before, and now I see a few a day. So they are obviously making a marketing pitch, and that suggests to me that maybe there's an uptick in business.

Flippen: Now, for the most part I feel like I could have guessed a lot of these businesses, if I had given it some thought, would be doing well in this environment, but in our quick little doc here, I see you've put down just some basic notes. [laughs] And you wrote five words. You wrote, "Wayfair, don't trust this one." I'm just so interested. I know that you've talked about this previously, but I'm so interested about why.

Kline: So I like Wayfair as a consumer. I purchased a pantry from Wayfair. They originally sent me a table, when they corrected that, and it was a pantry. It's a very nice piece of furniture for what I paid for; maybe $300. It's kind of flimsy, but not too bad. And a pantry is something you can buy from a picture. Right now, people are buying a lot of office furniture, and I know I'm not overly picky about my desk as long as my desk is, like, the height it says it was, as long as the chair is reasonably padded. I will point out that the one I'm sitting on now is absolutely not, and it's unbelievably uncomfortable. But for the most part, there are certain furniture you can buy via Wayfair, which is a purely digital company. So they're getting a lot of new customers, they're doing really well.

Who knows, if this abates and at some point, people don't need office furniture, but I don't buy their business model long term. And the reason for that, and feel free to disagree, is, I'm not buying any big-ticket furniture, a couch or a bed, without sitting on it. I'm not buying a kitchen table, where I am going to have to sit in those chairs every night for the next decade, without sitting in the chair. It seems crazy to me that furniture would become something that's a digital-only model.

Now, I totally like the idea of like Restoration Hardware, where you go into the showroom and you can look at it and then you order it and they deliver it to you, that's fine, but furniture that you cannot touch seems to me like a very strange business model.

Flippen: I think I'll take the counterside of that argument. I know that we talked about this, I don't want to get too stuck into Wayfair. I know there was an Industry Focus episode recently that went over it, but Wayfair went through a really big transition recently with their management team, essentially coming out and saying, "Oh, my gosh, we've become a bloated company that has no chance of reaching profitability unless we make substantial changes to the way that we do business." And 67%, I think, of their sales are repeat customer sales. And they're still spending billions of dollars on customer acquisition costs, when in reality they have an audience that's already there and it's already sticky. I'm not sure they need to sell really high-priced furniture. I think what they need to do is just optimize the customers that they do have, that will make relatively routine cheaper, mid-tier, let's say, furniture purchases, a level above IKEA, but a level below Restoration Hardware, if you will?

Kline: Yeah. So I'm not saying this is a bad company, I'm saying, don't believe the coronavirus bump. I don't think it translates -- people needing something now doesn't necessarily translate to loyal customers. And what I talked about with Domino's, the ability to capture a customer, pizza is something people order weekly, monthly, you know, regularly. People don't necessarily buy furniture regularly, so I'm not entirely sure that I believe that just because I bought some office furniture now that if a year from now I'm going to buy a new kitchen table that I'm going to remember that Wayfair exists or I'm going to be happy to be getting their emails. I'm not saying it couldn't happen, I'm just saying this is one where I'm not sure people are getting exposed to something that's a great product and using it. This is a lot like people buying out all the toilet paper at Office Depot. Office Depot is still kind of a lousy business but they had toilet paper, so they made some sales. Not equating Wayfair to Office Depot, just saying I'm a little bit wary of the sort of one-time bump here.

Flippen: Okay. So I want to push back on this, because you wrote another note in this doc and it's four words, it says, Best Buy, Home Office. If that's true for Wayfair, wouldn't the same be true for a company like Best Buy?

Kline: Yeah, except Best Buy was a profitable company before this. So why I consider Best Buy a surprise winner is Best Buy stores closed pretty quickly. They're doing curbside pickup. But I felt like, people probably weren't going to buy laptops, they're probably going to be pretty careful with their spending, and that Best Buy would be considered nonessential, and that is not what happened. Best Buy came out and said they've had a sales spike, people are buying appliances, extra freezers to store meat in, they're buying office stuff, they're buying entertainment stuff. I thought those sales would go more to Amazon, would go more to Walmart, places that are still open, Target.

Obviously, in a few markets, they're not allowed to sell nonessential items, but in most places, those whole stores are open. And Best Buy has shown a connection with its customer that has been really strong. I think it also benefits Best Buy that Amazon slowed down its shipping time for certain items. So if you needed a computer, it was probably faster to get a curbside pickup from Best Buy than order it from Amazon.

So this is one strong company, great management, Hubert Joly, the executive chairman, who was the CEO, is still very much in charge of strategy there, and he executed one of the more impressive turnarounds. Remember, this was a company that -- and I don't remember the exact timeline, but let's say, six or seven years ago was left for dead, that's sort of where the term showrooming came from, the idea that you'd go to Best Buy, a Best Buy associate would do all the work, and then you'd buy it at Amazon. They've turned that around 100%. And even if they end up coming out of this with sales down a little bit, the fact that they're not in the same place a lot of other retailers are where sales are falling off a cliff is really, really impressive.

Flippen: Yeah, the last stock that I sold, which should really tell you how often I sell stocks, which is never, but the last stock that I sold was Best Buy a few years back. And it was not the best investing decision that I made. I never went around to repurchasing it, because I was always a little uncertain about what the future looks like for Best Buy.

But Best Buy has been proving itself as an essential retailer -- it means something different now, but as an essential retailer before this coronavirus. And the fact that this global pandemic has now led people back to Best Buy, I think it's just reiterating the fact that, similar to Wayfair and Amazon world, Best Buy has a niche, and they've carved it out.

Kline: Yeah, and they're not the lowest-cost player. So they've established a niche with service. And people will pay Geek Squad way more money to do an install then it would probably cost you to go on the internet and find someone to do that install, but there's a level of trust. Best Buy has also bought a health services company that does home monitoring and sort of an advanced version of that, and that's going to be a big growth area.

So this is a company that has really built an ecosystem and relationship with its customers. And I liked Best Buy before this, but I am surprised by how strong that connection is right now.

Flippen: Well, Dan, I feel like if I'm getting anything out of this, I should go pick up a pack of hard seltzer [laughs] and maybe rebuy some of that Best Buy stock that I sold off a couple of years back.

Kline: You can't go wrong with either of those.

Flippen: Well, thank you so much for coming on today. It's been fun to talk about some of the surprise winners with you.

Kline: And thank you for exposing the fact that most of our preparation for this one was two- to four-word sentences.

Flippen: [laughs] Well, with you, nothing really requires much preparation. You always come with so much to say, and our listeners definitely appreciate it.

Kline: I appreciate it. Looking forward to next time.

Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out, 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.

Thanks to Austin Morgan for his work behind the screen today. For Dan Kline, I'm Emily Flippen. Thanks for listening, and Fool on!