You Still Can't Beat Apple -- but Oreos May Be in Trouble
On this Market Foolery podcast, host Chris Hill and Motley Fool Funds' Bill Barker discuss the latest news from a quartet of well-known companies: Apple (NASDAQ: AAPL) is just getting more profitable, Mondelez (NASDAQ: MDLZ) CEO Irene Rosenfeld will be replaced by an outsider, Groupon (NASDAQ: GRPN) missed on earnings but still saw share prices jump, and movie theater giant AMC Entertainment (NYSE: AMC) previewed a horror show of a quarter for its industry.
A full transcript follows the video.
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This video was recorded on Aug. 2, 2017.
Chris Hill: It's Wednesday, Aug. 2. Welcome to Market Foolery! I'm Chris Hill. Joining me in studio today, from Motley Fool Funds, Bill Barker. Happy Wednesday!
Bill Barker: Thank you!
Hill: We've got earnings. Holy cow, do we have earnings. We're going to talk snack foods; we're going to talk the movie business, which, based on what's happening with movie theater stocks today, appears to be in a little bit of trouble. But we're going to start with the biggest fruit company out there, and that's Apple. Third-quarter revenue comes in north of $45 billion. As impressive as that is, their gross profit margin, 38.5%. Was there a number that stood out to you with this quarter? For me, the gross profit margin, continuing to tick up just a little bit, is maybe the most impressive thing about Apple.
Barker: That's a function in part of the services, which are higher margin, and those being a bigger chunk and growing faster than the rest of the company. In fact, growth is hard to anchor on with Apple, because with the cycle of new iPhones coming out, it's not 10% more sales every year over year kind of growth. Sometimes one of the iPhones hits and there are millions more units than the year before, and then you're off cycle and it's much less. Second quarter is always the weakest for Apple. In terms of bottom-line profitability, this is the least important quarter. More important is, are they going to get the new iPhone 8, or whatever they're calling it, out in time for September? And the higher-end phone in time for Christmas, possibly? But it was a good quarter. Everything -- iPad, iMac, iPhones -- all outperformed expectations.
Hill: Do you think there's a legitimate chance that they're going to miss this new iPhone release? I know there are rumors that the launch of the iPhone 8 is going to be pushed back, and part of those rumors are informed by a report out of Apple, because Apple puts a blackout period for their employees when something big is coming along. It's essentially Apple saying, "Don't take any vacation for this block of time." Reportedly, the block of time is enormous this fall. It's early September to late November. But they're not going to miss altogether, are they?
Barker: Miss altogether as in nothing happening before Christmas, you mean? No.
Hill: That would be surprising.
Barker: I think the conference call, which I haven't listened to to but read some of the reports of, indicate that Cook is presenting a normal outlook for the rollout of the phone. There's no indications there that there's going to be a miss. So the rumors do not have as much traction today that there's going to be a delay.
Hill: This will be the 10-year anniversary of the release of the iPhone. Is it, in your mind, fair or unfair that there are heightened expectations for this iPhone release because it's the 10-year anniversary?
Barker: That would be unfair, because there's no cause and effect. Thinking that a 10-year anniversary has to lead to anything significantly different is, really, the downfall of many marriages. You expect, here's that 10-year anniversary, somebody's got to deliver on this. Look, really, why? Just because it's 10? Come on. What did you do for your 10-year anniversary?
Hill: I honestly don't remember, it was so long ago.
Barker: I delivered, actually.
Hill: Did you?
Barker: Yeah.
Hill: Do tell.
Barker: Here's what I did for my 10-year anniversary. We went back to, I arranged every night for 10 nights, to go back to --
Hill: I remember this!
Barker: -- a restaurant that had been a big part of our courtship years, or, early getting to know each other time, and with friends that we had lost touch with or were still in touch with. It was a great way to revisit old memories and old friends, and then it was a surprise every night as to where we were going.
Hill: I don't remember what I did for our 10-year anniversary, but what you did was so much better.
Barker: Yeah. I'm not going to claim that other anniversaries have lived up to that.
Hill: You're just coasting on it since then.
Barker: Yeah, I'm still talking about it. I don't know what anniversary I'm at now, but it's more than 20.
Hill: You may ask yourself, what does this have to do with investing? The answer is, we see this all the time in the business world -- companies coasting off one great thing they did one time, and the expectations that follow.
Barker: Yeah. Whatever Apple does is unlikely to match what I did for my 10-year anniversary. I think we can all agree on that.
Hill: I don't think there's going to be 10 nights worth of an iPhone 8 release, if that's what you're suggesting.
Barker: Exactly, like a new phone every day for 10 days, and you have no idea how good it's going to be.
Hill: We'd better move on. Second-quarter results from Mondelez were overshadowed by the news that CEO Irene Rosenfeld is stepping down in November. She's going to remain as chair of the company. Eleven years in the corner office for Irene Rosenfeld. It's kind of interesting that Mondelez is bringing in an outsider, someone by the name of Dirk Van de Put, who's coming over from McCain Foods. They're bringing in an outsider, and that suggests to me that all is not well at the house of Oreo at Mondelez. If your thinking is "We need some fresh perspective, and we're going to bring in an outsider," I think that's what this move telegraphs, as opposed to "Everything's been going so great for so long that we just need a top lieutenant to come in and keep this steady ship afloat."
Barker: It's reasonably tough times in the packaged-food services sector, and Mondelez has not really escaped that and has not outperformed the competition. So I can see going in a new direction as being one of the possible solutions, particularly over the last three years, it has not lived up to the competition. So you might be right about that. I haven't seen the details, and I'm sure they're not saying anything like that, but it's been an underperforming stock for quite a long period of time. The house of Oreo, it's a lot more than that. Maybe not to you.
Hill: It is the No. 1 cookie brand. I think --
Barker: Biscuit.
Hill: Biscuit?
Barker: Yeah, it's in the biscuit division at Mondelez.
Hill: Maybe that's part of their problem. You showed me a story earlier this morning online, and it was a still photograph of Irene Rosenfeld, and as you indicated, Mondelez has many brands under its umbrella, and the brand that was prominently featured behind Irene Rosenfeld was, in fact, Oreos. So that's the one they're most associated with.
Barker: Yeah. Certainly, it's the one we talk about the most on this show, although Cadbury is probably a bigger part of the business, I believe. They're the No. 1 or No. 2 chocolate maker in every country, every major market in the world, except U.S. and China.
Hill: Is Hershey No.1 here in the States?
Barker: I believe Mars is No. 1.
Hill: Oh, yeah, that's right.
Barker: I'm not entirely sure if it's Mars or Hershey, but Mars possibly. I don't know about China, who's No. 1. I know Hershey is not really competition around the rest of the world. It's mostly Mars and Cadbury everywhere else.
Hill: So in terms of this new CEO coming in, beyond looking at the cost structure in the Oreo division, which is, as we've talked about before, incredibly bloated because they have way too many people working in the Oreo division, do you think that this new CEO is going to look to shed some of the brands that they have? Because that's a strategy we've seen from larger consumer-goods companies -- Procter & Gamble leaps to mind. But I'm thinking about the stock. They have some really strong brands under their umbrella. It's kind of like when Ford Motor had a record year in terms of sales and the stock went nowhere, and you could reasonably look at that and say, if you just sold the most vehicles you've ever sold and that's not moving the stock, I'm not entirely sure what does. They have the No. 1 cookie brand. Do they need to start shedding some of these other under-performing brands in order to make this a stock worth owning?
Barker: Well, certainly, getting rid of anything that's not worth the investment makes sense. If you have new leadership coming in, they can look at things, and even though there may be people who have been working on one specific brand for a long time, and you have a lot of entrenched interests, new eyes can come in and say, "Look, Chiclets really aren't going to be worth doing for the next 50 years." I don't think Chiclets are in any danger, but that's one of the many brands that they have. I don't know, when's the last time you had some Chiclets?
Hill: I think I was a child. That's how long ago it was.
Barker: Yeah. So I think the biggest brand introduction of late that they keep talking about is the Oreos brand chocolate that they're selling now in the U.S., Oreos Milka, I guess. Have you ever heard of this?
Hill: No, never heard of this.
Barker: Let's get you started on Oreos. You presented almost as fact that Oreos was this bloated division with way too many employees.
Hill: I'm waiting for proof that it's not. Look, if you work in the Oreo division, you should be quaking in your boots that a new CEO from a completely different company is going to be occupying the corner office, because that's one of the first things Dirk is going to do when he takes over. Like, "Show me the P&L on the Oreo division," because, again, it's the No. 1 cookie in the world, and somehow this is a stock that's gone nowhere for a year.
Barker: And your research into whether Oreos is a bloated division is going to grocery stores and getting angry at the number of choices of flavors that one can get with the Oreos brand now?
Hill: Exactly, way too many. Stop spending time and effort on these one-off insane flavor combinations. Just keep making the basic Oreos, the thin Oreos and Double Stuf. You can even talk me into the chocolate-filled ones as well. But for crying out loud, stop with the Peeps. Just stop. Move on. You've already got a hit. Move on to other divisions.
Barker: Was it Peeps, was that the straw that broke --
Hill: Yeah, Peeps was the straw that broke my back on that one.
Barker: And since then, you're kind of inundated online with people researching these and sending them to Facebook and the Twitter.
Hill: I appreciate them. I always appreciate the research.
Barker: Here's a little bit of anger for Chris Hill. Here's a picture of some new insane Oreos brand.
Hill: It's two things. One is, there's no substitute for boots-on-the-ground research, so I always applaud that. Two, it signifies that I'm not the only one who thinks this way. It's other people taking photos and tweeting them or posting them on Facebook and saying, "Oh my God, what are they doing over there?"
Barker: I don't know. if I were going to change something, I think I would change the name.
Hill: Of Oreos?
Barker: Mondelez.
Hill: Oh, yeah.
Barker: What is this?
Hill: Just change it to Oreos. [laughs]
Barker: [laughs] But as a stock, it has under-performed any relevant period, most dramatically over the last year. Three, five, 10, 15 years against the S&P and against the confectioners; it's just not keeping up with the competition. They have a lot of well-known brands, and their playbook has been, "Let's extend those brands by combining Oreos with Peeps, or Chips Ahoy with root beer flavor," or whatever they're doing over there, and now Oreos Milka chocolate. So they've acquired a few brands, and they paid out a bunch of dividends. That's probably been a better use of their capital than some of the acquisitions. But I would agree with what appears to be the case that some new thinking is going to help.
Hill: Change is absolutely coming to Mondelez.
Let's move on to Groupon. Second-quarter revenue came in lower than expected, but it couldn't have been that bad, because shares of Groupon are up more than 7% this morning. I don't know where to go with this one; I'll be absolutely honest. The thing I can't get over with Groupon, and we've talked plenty of times in this calendar year about Snap and Blue Apron and the way those stocks have gone since their IPO. They pale in comparison to Groupon, which, since its IPO in late 2011, that stock is down, even with today's move, more than 80%. And I just don't see the case for this company. It seems like it really does belong as part of someone else's empire. And I'm sure there's a price at which someone, whether it was Google or perhaps even Facebook, there's a price at which they would probably pay to acquire Groupon, but it can't be a whole lot higher than where it is today.
Barker: I guess I have to wonder as to why there's a price they would acquire Groupon at. Granted, Groupon has an email database. They have a lot of people ignoring their daily emails.
Hill: Are you on their list?
Barker: I don't think so, or the spam filter is doing its job. But I don't think I'm on it. I assume they're inundating people with daily emails, if you choose to get those. But those names, Facebook and Google and Amazon, they already have your email. They already have everybody's email. If they don't have it, Groupon isn't going to have it, because you have to be off the grid, I think.
Hill: No, I think that's probably right.
Barker: So why are those people going to acquire Groupon?
Hill: One thing we talked about the other day was Costco marketing their memberships through Groupon, and we were laughing, because -- and by "we," I mean Jason Moser, Taylor Muckerman, and I -- all had the same gut reaction, which was a slight wincing, like, "Oh, God, what is Costco doing?" But then, the more we talked about it, it was -- first of all, this is a relatively small test, presumably, for Costco. And if it's effective for Costco, then they've gotten people into their membership. We know Costco is already really good at retaining members. So that could be a smart move for them. That got me thinking about this latest quarter for Groupon. Maybe that gives this company a little bit of life, if they're seen as a really effective way of getting people into memberships. But the whole one-off experience thing, I don't know. All you have to do is look at the performance of this stock since they went public to know the health of this company, and it's not great.
Barker: No, it's not great. Although it's bounced significantly off its lowest lows of the year. So there's a little bit of hope. They do have enough people in the database that, if they can come upon a more useful way to get offers to people than they have, and advertising, of course, something they've been really firing on all cylinders on, in your opinion.
Hill: [laughs] On YouTube. God, those things are the worst, they're just absolutely the worst. They are the most --
Barker: What are those things? Because they're not targeting me.
Hill: They're YouTube ads. So if you go on YouTube --
Barker: I do go on YouTube, and I see helpful ads.
Hill: You know, there are some creative ads on YouTube these days, and some that are creative enough that I will actually sit and watch them before whatever video I'm looking for actually loads. But Groupon, I'm not going to --
Barker: Could you sing a little bit of it?
Hill: No, I'm not going to do that. I'm not going to pain people with the annoying singing Groupon ads. Those people know who they are. Whatever this ad agency in Chicago that came up with them -- you have to be concerned. You have to be concerned if you find out that your ad business is done by the same people in Chicago who are doing the Groupon YouTube ads.
Barker: You know what? There's no such thing as bad publicity. Right now, they're getting talked about a lot. You have dozens of listeners, and they're all hearing about this and going to YouTube right now, loading and loading and loading again waiting for that Groupon ad to assault them.
Hill: As soon as they see it, they're going to know exactly what I'm talking about.
AMC Entertainment. Holy cow, what a Dumpster fire that thing is today. A warning on their second-quarter results, and the stock is down 24%, and this is absolutely one of those cases where they're dragging other stocks down with them. This is the movie-theater company, AMC. You look at Regal Cinemas today, you look at NCMI today, both those stocks being dragged down by a horrible warning by AMC. And if you're just looking at box-office numbers, this is a little bit of a surprise. In terms of how the box office is doing in 2017, overall, it's doing fine. If you look at what AMC is reporting about the state of their business, things are not well.
Barker: You say the U.S. box office is doing just fine. AMC said in its report that the U.S. box office declined 4.4% in the second quarter. That's not 26%, which is what the stock has declined by. It's yet another data point in the bear case that people are not going to theaters anymore. They're still getting in $1.2 billion a year for the quarter, but it's just getting too expensive to go to the theater. And what do you get in return for it compared to what you get at home? It's the same thing that's going on, to a lesser extent, in restaurants versus home meals, whether it's delivery or just preparation. The gap between the price of doing something at home and the price of going out to do it is growing, and it's not growing in a way that helps AMC, and they're not adding enough services, try as they might to have more restaurant options, food in the theaters, or drink, or more reclining chairs. All of this is costing them, and it's not adding up to an experience that people are taking them up on.
Hill: They also, locally here in the D.C. area, had a little bit of a PR snafu. You said there's no such thing as bad press, but AMC got some bad press here in D.C., because there's an iconic movie theater in Northwest Washington, D.C., The Uptown. It has this fabulous marquee, a gorgeous old theater. I've only been to a few movies in my lifetime in that theater, but it's a truly grand theater to go see a movie in. And AMC bought it and announced they were going to be taking down the iconic marquee and putting up their own name, which is certainly their right, because they want to get the AMC brand out there. And there was just utter outrage from people in D.C. And they quickly and wisely reversed course on that decision.
Barker: Yeah, they didn't quite understand that it was not just an iconic place to go, but an iconic sign to be seen, driving up and down the Connecticut Street in traffic. You see it for a long time at times, as the traffic doesn't move very quickly.
Hill: [laughs] Right, depending on the time of day.
Barker: I'm looking at the local AMC theater, giving them a little publicity, Hoffman Center 22. You can go to 22 different screens there.
Hill: It's just a few blocks from our office.
Barker: They're playing Fast Times at Ridgemont High for some reason.
Hill: Really?
Barker: Yeah. You can pay, I don't know, $10.50 to go see Fast Times at Ridgemont High on the screen, for some reason. And where else are you going to find $8 popcorn? So I guess it makes sense. You're not going to be able to do that at home.
Hill: I'm a fan of that movie, but there's nothing about that movie that screams, "Boy, you have to see this on the big screen," whereas when Gene Wilder died last year and there were AMC movie theaters, including the one close to Fool HQ, that showed Blazing Saddles and Young Frankenstein for a weekend, I did pay money to go see Blazing Saddles because I love that movie and I had never seen it on the big screen. I applaud the move to show older movies to try to bring in different clientele. But, yeah, you have to give me a good reason to see it on the big screen. Like, Lawrence of Arabia? That's a movie you have to see on the big screen.
Barker: Yeah. You never think that with Fast Times. It seems perfectly appropriate to watch that at home, and a bit easier to drink, I think, while you're watching it.
Hill: Absolutely. We're going to go back to movies in just a second. But first, an announcement, speaking of Washington, D.C., and local events. We're going to be doing a live taping of Market Foolery next week, Wednesday, Aug. 9. We're going to be doing this at Chatter, which is a restaurant in D.C. in Friendship Heights. We put this news out on Twitter and Facebook, and if you email us at marketfoolery@fool.com, we'll send you all the details. But you can also just look up online chatterdc.com -- that's the restaurant's website. It's going to be myself, Bill Baker, Ron Gross, and of course, our man behind the glass, Dan Boyd will be there making sure all the equipment works. This is a restaurant in D.C. that has a podcast studio. If you're familiar with Tony Kornheiser, one of the longtime co-hosts of the highly successful ESPN show Pardon the Interruption, that's where he tapes his podcast. We're going to be doing it 11:30 a.m., doors open. Come on out. We'd love to see you. That's Aug. 9, 11:30 a.m. at Chatter in Washington D.C.
I'm not going to go see Fast Times at Ridgemont High.
Barker: How about Princess Bride?
Hill: Is that playing also?
Barker: In October. You have presale tickets now available.
Hill: I would go see that on the big screen. I mean, I saw it when it came out on the big screen. But I would take my kids, because that's a movie we all love. Are there any first-run movies that are coming this fall, besides, of course, Star Wars: The Last Jedi -- I think everyone in the world is going to go see that -- but what's coming this fall that you think, "You know what? I'm going to go to the theater to see that."
Barker: That's probably it.
Hill: Really?
Barker: Yeah. I still owe Dunkirk a watch. I think that's a big-screen movie. Have you seen it?
Hill: I have not seen it. That's absolutely a big-screen movie. I'm a little surprised that, as big a tennis fan as you are, that the upcoming film this fall, Battle of the Sexes, where Steve Carell plays Bobby Riggs and Emma Stone plays Billie Jean King, that looks like a really good movie, and I'm surprised that's not on your list to see.
Barker: It doesn't scream out "big screen." I can wait for that. There are 50 different TV series that I haven't watched yet that everyone says I must watch that I haven't gotten around to. So why spend $20-$30, before the popcorn, which I always get, which is another $10, to watch that?
Hill: That's your go-to move in the movie theater? You have to have popcorn?
Barker: Yeah. Well, I am an American. What do you have?
Hill: I could take or leave the popcorn.
Barker: Are you a communist? What is this? What's more American than having popcorn in a movie theater? We invented that, right? [laughs] Probably not.
Hill: Did we? I don't think we invented that. Raisinets.
Barker: Oh, that just because of Blazing Saddles.
Hill: Yeah, it all goes back to Blazing Saddles.
Barker: To go into some actual business discussion of AMC, here's their solution they're going to implement. Cost-saving and revenue-enhancing measures, including promotional offers, strategic pricing, and a reduction in operating hours and staffing. So they're going to show fewer movies, and I don't know, that's going to save them some money.
Hill: Showing fewer movies?
Barker: Yeah. If they're operating fewer hours. Maybe that means that, on a Wednesday on November, there's no reason to show something at 12 in the afternoon for two people.
Hill: OK, I could see that.
Barker: But it's going to be a reduction, I think, in services, and more promotional pricing. Now, promotional pricing might just be, get three large popcorns and two drinks for $35 instead of $39.
Hill: That sounds like a deal that you would be all over.
Barker: [laughs] That might be a promotion. I don't know. I'm sure that I've got some levers they can work with there. But it's a long-term problem, that the viewing options, as screens at home get better and better, and everybody gets more access to larger databases from Netflix and Amazon Prime and everything else, the theaters are continuing to suffer. If you start compounding a 4% decline year over year, you get to the danger zone very quickly.
Hill: Murder on the Orient Express, that's what I'm crossing my fingers for. I'm hopeful that the reviews, when it comes out this fall, are positive. When I saw a movie recently and that was one of the previews, I thought, I really hope that's good, because a really good Agatha Christie murder mystery, come on!
Barker: Yeah. I directed an Agatha Christie play in high school.
Hill: What?
Barker: Yeah.
Hill: [laughs] Wait a minute.
Barker: Boy, was it bad. The play itself was not bad. It was the director.
Hill: Was it Ten Little Indians?
Barker: No. It was the little-known Appointment With Death. That was made into a movie at some point, which might have been called Murder Under the Sun as a movie. I'm not sure.
Hill: Oh, yeah, I know it as Murder Under the Sun. What did you do as a director that, if you look back on, and you think, here's one thing I would do differently, or, slash, better?
Barker: One thing I would do differently is not determine which play to direct based upon how many of my friends I wanted to get into the cast. I think that was a poor choice. And I think I would choose a different director.
Hill: That's a smart move.
Barker: I think that would have helped. I put a lot of effort into it, but I don't think that's where my talents ultimately lie, in stage direction.
Hill: I think the fact that you made a career for yourself that has absolutely nothing to do with the creative-arts indicates that that was a smart decision on your part. You can read more from Bill Barker and his colleagues. You can go to foolfunds.com and sign up for Declarations. It's the free monthly newsletter from the Fool Funds team. Check it out. It's great content, and, again, it's free.
Barker: What would you say is the highlight of your on-stage repertoire?
Hill: Being nowhere near your directing career. In hindsight, now that I know that --
Barker: Was it high school? Was it college? You performed with some people in college, right?
Hill: I did. I performed with a couple of people here and there. We'll talk about that after the show. We have to wrap up and get out of here. 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 stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!
Bill Barker owns shares of Apple. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Apple, Costco Wholesale, Facebook, Ford, Netflix, and Twitter. The Motley Fool has a disclosure policy.