In this podcast, Motley Fool senior analysts Asit Sharma and Maria Gallagher discuss:
Chewy‘s (NYSE: CHWY) pricing power and strong recurring revenue.
The cyclical problem facing Coinbase (NASDAQ: COIN).
Reliance Industries‘ offer to buy Walgreens‘ international stores.
A growing world population means more mouths to feed. Motley Fool analyst Deidre Woollard and Motley Fool contributor Demitri Kalogeropoulos serve up three stocks and explain how the companies behind them are shaping the future of food.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on June 27, 2022.
Asit Sharma: Investors chew on a Chewy upgrade, Walgreens wants to sell its UK pharmacies, and Coinbase Global is singing the crypto blues. Motley Fool Money starts now. I’m Asit Sharma sitting in for Chris Hill, and I’m joined today by Senior Analyst, Maria Gallagher. Maria, welcome.
Maria Gallagher: Hi, Asit. How are you?
Asit Sharma: I’m doing well. Not too bad for a Monday. Maria, shares of Chewy this morning, high in the markets on upgrade from hold to buy by analysts at Needham and they cited pricing power, and supply chain improvement in their upgraded forecast. Now, as we tape, I think shares have leveled off. But in general, a pretty good endorsement of this company, which a lot of investors have had some questions on.
Maria Gallagher: I’m a big fan of Chewy. I’ve been a big fan of Chewy for a while. What I think what’s so great about them is the recurrent aspects of their purchases and the stability of these revenues. About 72.2 percent of their net sales are Autoship customers, so people who say get their pet food delivered to them every month and though this is a really stable set and recurring set of revenue. What’s great about that, so you have that stability and then you see that growth increasing throughout the year or so. In the first year, a customer usually spend less than $200 but by Year 5, if you have a dog maybe your dog needs more snacks, maybe it needs some medication, maybe it needs different toys. People are spending about $700 in their 5th year on the platform, so you see that expansion from those recurring revenues. They have over 100 percent retention rate for each cohort of their customers and so over the past three years, they’ve gained about 2/3 of their active customers.
Right now they’re about 20.6 million. It’s going to be really important to see how those new customers continue with that recurring revenue and expansion platform that they have and you see that logistics and customer service is going to be what continues to drive this relationship. Chewy has a great reputation for incredible customer service and getting your things on time is a very important part of this recurring nature. Your dog needs to eat every month, so you need to make sure you get their food on time, and their medication on time. I think it’s really important that that’s what they are investing their time and their money in, as both expanding their addressable market, expanding their options for people can buy on the platform, but expanding their logistics services to get people the things that they need to over time. But I overall think this is a really great business and really resilient.
Asit Sharma: I want to go back to a statistic that you cited. They have gained 2/3 of their customer base in a short amount of time thanks to the pandemic. I think that’s a large part of that. Is there some execution risks going forward with this big influx of customers that they won’t be able to keep up these great metrics on customer retention and growth of the cohorts as they go along? I know they’ve been straining at the edges a bit in the post-pandemic world with all the supply chain issues everyone else is grappling with. Do you think they are at risk of maybe dropping off their latest customers?
Maria Gallagher: Yeah, and I think that’s what people are really going to be monitoring the next couple of quarters. What’s interesting I think is what the convenience of Chewy brings to customers and how much people value that. Before the pandemic, people would say, “Oh fine. I’ll just drive. I’ll get the food, whatever. It doesn’t matter.” But I think once you start and you get in with that convenience, I think that a lot of people are going to not look back when every month, you don’t need to think about it, you know it’s going to show up every month, you have all of your options there, you can get stuff for the pharmacy, you can get all the toys, you can get everything you need in one place. I think that convenience, once you’re in the habit, it’s going to be really hard to break the habit, so I think that they have momentum with these customers on their side. As long as they can keep up the supply chain and the logistics and the customer service which are the three things that are really important to keep those customers, I think that they would have to do something bad to get the customers to leave. If that makes sense. I think that the momentum is really on their side with these cohorts.
Asit Sharma: Good. So this seems to be a case of just keeping on with what’s working. Don’t try to tweak it too much, just execute.
Maria Gallagher: Yes, hopefully. I really like Chewy. I think that they have a well-deserved reputation in the industry for their customer service. I think they have a well-deserved reputation for being reliable and those two things are going to continue to be the most important. I’m glad to see leadership instead of saying, “We’re going to expand to all these different things,” that don’t really make as much sense. They’re expanding where it makes sense with pet care and they’re really doubling down on logistics and customer service.
Asit Sharma: Coinbase stock is down roughly eight percent as we tape this morning, Maria, on a downgrade from Goldman Sachs, from neutral to the dreaded sell. Goldman cited lower crypto prices and decreased activity in the industry both of which don’t seem to bode well for a digital asset’s brokerage.
Maria Gallagher: Coinbase is really tough and it is I think a smaller part of the overall trend in the market. Coinbase is down about 80 percent from its all-time highs. It’s so obviously heavily relying on consistent purchases of crypto, which has heavily decreased. In mid-June, they announced that they would take an overly aggressive stance on hiring. They cut 18 percent of their workforce, they also rescinded offers from people. There is a lot of that going around LinkedIn and social media saying people quit their jobs and then Coinbase first send out their offers, which is not great for retention and hiring. If the company bounces back in the next couple of years, I think that reputation will stay with them. They also launched a social NFT marketplace in May. They’re getting sales of about 19,000 sales per week, but that’s compared to about 225,000 sales in the month of September of this year. We’re also seeing the tapering of interest in NFTs. I will say it’s not just Coinbase.
Gemini is cutting at least 10 percent of its staff as well. People are talking about this term called the crypto winter, which is a bear market for crypto, but they don’t have the historical precedents to believe that it can bounce back or that there’s this intrinsic value within the assets to help them bounce back. The last crypto winter was from late 2017 to December of 2020 and so people are saying that they’re not sure if this is going to be the end of crypto or if it’s just going to be a prolonged slowdown in crypto if it’s going to make a comeback. It is just so much newer than the other markets we’re seeing slow down. I think that Coinbase isn’t alone in having all of these problems and I think it’s an indication of the wider interest in the crypto industry.
Asit Sharma: Do you think Coinbase could be at the right place at the wrong time? [laughs] What I mean by that is, I’ve read through the S1; their perspectives before they went public and I thought their case was convincing and basically, I’ll boil down the argument to this. When Bitcoin is rising, our volumes go up, we throw off tremendous cash flow, and we use that cash flow in the meantime to extend into things like this NFT marketplace, into areas like DeFi, but these conditions in which we might be entering a crypto winter, maybe they crimp the volumes so much and hurt cash-flow so much that it really won’t matter how much of these peripheral parts of the crypto market or the digital asset market they expand into and maybe they’ll be growth challenged for several years to come. Do you think this could be the case or am I being overly pessimistic about Coinbase and maybe the crypto market in general?
Maria Gallagher: The rationale for their business model is logical. I think it makes sense. I think it’s a smart way to operate a business, but it is just so heavily reliant on consumer interest and consistent trading volume so it’s not only people buy and hold, its people buy and sell and buy and sell a lot because like you said, that trading volume really matters for their overall revenue. I think that when you take the decreased interest, the decreased volume, the decreased interest and not only that, but those peripheral businesses like you’re saying, the business model makes sense, but the business model only makes sense when all of the other things are working in their favor and I don’t know for how long this is going to last where things are not working in their favor.
Asit Sharma: Well, one thing the crypto market has shown us is that it’s impossible to predict. Every time it seems like the market is just going to dry up, excitement builds again. It’s a very cyclical type of market so who knows? Maybe we see them just growing in a wave pattern, hitting some peaks and troughs over the next few years. News out this morning that Walgreens is nearing a deal to sell its Boots pharmacy business in the UK to India’s Reliance Group. Reliance is checking in with its bankers Maria, to raise up to eight billion dollars for a leveraged buyout of the Boots chain. What do you make of this deal?
Maria Gallagher: I think it makes sense. Like you said, they’re trying to raise about eight billion dollars. Boots runs a network of about 2,200 stores across the UK. If you’ve been to the UK, you will see Boots the way we see Duane Reade and see the Walgreens everywhere here. This is really just a continued strategic shift for them more into the US healthcare business. Walgreens Health has been building out since October of 2021, which is this delivered healthcare platform. They have investments in VillageMD, Shield Health Solutions, CareCentrix. They have partnerships with Clover Health and Blue Cross Blue Shield of California with a patient population over two million. They’re really trying to focus more into the healthcare industry so I think that it makes sense that they’re trying to spin off that part to try and really focus on building out those capabilities within the US healthcare network.
Asit Sharma: Do you think that Reliance Group, which is so far have been, I’ll describe them as a multi-fasted conglomerate in India, do you think that will raise their profile a bit, it seems to be their first big acquisition or at least giant-sized acquisition outside of India where they’ve made a few forays into some other geographies?
Maria Gallagher: I think it could be because one, Booth is it really recognizable name, also Booth is growing, so their UK retail comps were up 22 percent last quarter. I think it’s a good business and I think it makes sense for someone to want to buy it as well as it makes sense that Walgreens is trying to refocus strategically. They’re not saying we’re refocusing because this business is doing badly they’re just refocusing because they are trying to think of their future growth prospects and so I think it’s a really good acquisition for somebody to try and raise their stakes by saying outgrowing business that still has a really well-known and reliable name and reliable footprint.
Asit Sharma: I’ll point out is an Indian Extraction here that Reliance is run by Mukesh Ambani, who is one of the richest men on the planet and pretty savvy deal makers. They’ll be interested to follow this along and see it from Reliance’s perspective as well. Last question for you. For Walgreens, which has had, I think, a challenge in finding growth over the past several years. But it seems like a perennial company that might make a persuasive investment. I was just curious about your thoughts if they do go through with this disposition and focus more on that healthcare market. Is this the type of stock that you’d be interested in, maybe rounding out your portfolio, which I’m guessing is tilted toward growth, Ria, knowing you?
Maria Gallagher: It’s a little more tilted toward growth, I don’t do a lot of healthcare investing personally, so I would have to spend more time looking at their strategy, how their healthcare business runs from an ESG standpoint and from the way I’m thinking of its potential growth. I would spend more time looking at that, but I do think that I would be interested in that and I would be interested in spending more time looking at it.
Asit Sharma: Maria Gallagher, thanks so much for joining me.
Maria Gallagher: Thanks for having me.
Asit Sharma: What’s on your investment fleet? Deidre Woollard and Demitri Kalogeropoulos look at the future foods through three very different companies.
Deidre Woollard: To start off with, I want to talk about Beyond Meat, because I feel like as a culture we started to understand meat has a big cost and energy costs of water costs, labor costs, and it’s a simple way to improve your diet of course, but also make a change environmentally. As someone who was a vegetarian and has been off and on for about 30 years, wow, the world has changed for the better if you’re trying to eat meatlessly or even partly meatless because of those early vegetarian burgers that you’ve got at the dusty health food store. They were bad. I think what Beyond Meat has done and what impossible burger has also done is they’ve turned meat plant-based into something that’s acceptable, viable, and not suffer to have one of these delicious. But the question I have for you to Demitri is, does it make enough of a difference just to add this as a company? Some news recently was that Kellogg‘s announced its splitting its business into three. It’s got the snack business, things like Cheez-It Pringles, stuff like that. It’s got, it’s very popular cereals and it’s got plant-based, which is led by Morningstar Farms. That’s the of a lowest performer as it had about 340 million in sales with the Morningstar Farms brand. I’m looking at this, I’m looking at Beyond Meat’s first quarter. What do you think about this Demitri, is Beyond Meat going to be a winner in a long-term?
Demitri Kalogeropoulos: That’s the big question right now. I’m sure if noticed, the stock has been down a lot so far in 2022. It’s looking a little shaky right now from the business standpoint, demand took a really sharp turn, negative over the last, let’s say about three quarters, which is really jarring to see for growth stock. The big question is, do people still have? It appears that they don’t have the same appetite for plant-based meat products that they did in earlier phases of the pandemic. Beyond Meat who has seeing fantastic growth for most of the pandemic, and that really hit a wall in late 2021 in here into the first half of 2022. That could be a big problem in terms of our consumers just as willing to try new tastes. Basically, these are all new categories that Beyond Meat is trying to popularize, chicken tenders and things like that and jerky and all these different sausage products, ingredients, and taste that consumers aren’t really aware of so they have to be in the adventurous mood to try it out. Sales were essentially flat last quarter and they dropped the quarter before and net losses were almost 90 percent of sales this past quarter. That’s some jarring numbers to see. But at the same time, Beyond Meat is introducing a lot of new products, especially for the summer. They’ve got a new grilling value pack, I think, which is really well-timed obviously for the summer grilling season of their beyond burgers.
They’re planning a lot more product releases in the second half of 2022. Management said a couple of months ago that they think a big factor behind the slowing sales over the last couple of months is that they’ve pulled back on advertising and on promotions and on these new releases in part because of the supply chain issue. So they’re saying that that should help those challenges or ease over the next few months. The company do have a super valuable brand, a lot of great partnerships with restaurants and supermarket chains, there aren’t many other companies you can think of that have those valuable relationships. It’s spending more on promotions and taste testing and things like that in supermarket chains. I don’t know if you heard, but marketing is a big push. They recently signed Kim Kardashian as a brand ambassador for them, and that’s obviously a very big name. If you believe that these factors are going to support a rebound in sales, and that’s what management is hoping, then I think the outlook could be bright for the business. But personally, as I’m going to be watching for a little bit more of a demand rebound, evidence of that in the next couple of quarters before I would call Beyond Meat really a screaming buy right now.
Deidre Woollard: But like the partnerships, there are KFC, chicken nuggets thing appear to be a good success. I even like the Kardashian thing. But I think one of the challenges for Beyond Meat might be pricing and how they compare. Because in this inflationary period, people are really watching what they spend. What do you think Beyond Meat is going to do in a market where people are really paying more attention to what they spend?
Demitri Kalogeropoulos: That’s a challenge. I think that’s part of the appeal that boost sales a lot last year, if you remember, in earlier phases of the pandemic we had a supply challenge around a lot of meat products. At the same time people are cooking at home a lot more often, so they were way, way more focused on cooking at home and seem to be way more interested in trying out new tastes. Now as those supply challenges are eased on their substitute products like the other meat products, things like beef, pork, and chicken. That’s another challenge and it’s something that Beyond Meat doesn’t have control over. At least it’s a risk to watch out for going forward, especially now that consumers are getting more price-conscious.
Deidre Woollard: Yeah, totally makes sense. Well, let’s move on and talk about another stock that you wouldn’t necessarily think of when you think about innovation that’s Kroger. Kroger is a traditional grocer. But the more I study this company, the more I get impressed with their attitude toward innovation. This big growth, this is over 1600 stores, over 400,000 employees, yet they’re doing some really innovative stuff in terms of distribution, in terms of fresh foods, in terms of digital. Demitri, how is Kroger planning for the future?
Demitri Kalogeropoulos: You’re right, Kroger has a lot of really interesting things going on. Their main market share battle is with Walmart, the biggest retailer in the nation. The focus for both companies has really been fresh food lately there, they realized they both understand that most consumers make their decision about which grocery store they’re going to go to based on the idea of the fresh food, which one has the better like fresh produce. Kroger has been succeeding a bit better, I would say, than a lot of its rivals in this regard. A little past quarter, the company just said, I believe it was last mid-June. They revealed that growth continued over very strong growth a year ago.
Flowers were a standout performer, for example, and we know that’s a very perishable item. I think it’s a big testament to their entire supply chain that Kroger can succeed in a niche like that. Kroger is a very vertically integrated business too. They’ve got the supermarket chains and there’s this huge network, but they also own a lot of their own transportation, they own many farms, they own their own dairy farms, things like that. That vertical integration has given them a lot of flexibility in today’s environment where they’re not dealing with a whole bunch of supply chain bottlenecks. When you own the transportation, you can move it around and you don’t have surprise extra costs that a lot of these other companies are dealing with. Then you’ve got their move into home delivery.
As you mentioned there, the Okada platform is very popular. That’s something that’s going to just continue to grow as all the idea of getting food delivered, groceries delivered to your house. We’re seeing these platforms get closer and closer to big populations all around the country. Eventually, we’re going to be seeing same-day delivery for basically the entire country. I think that’s an area that which Kroger is going to succeed. But I wanted to highlight one quick comment to that CEO Rodney McMullen said in the earnings call in mid-June, the quarters in this dynamic environment where consumer behaviours are changing rapidly, we use our data and insights to be nimble and react quickly to ever-changing needs. He’s talking about there, they’ve got this data mining really big platform that tries to project merchandise needs and things like that and make a very personalized shopping experience. That flexibility has been really important since the beginning of consumer sales. But it’s even more important, I’d say today because preferences are changing so quickly in response to inflation like you mentioned in the pandemic. Kroger’s seems to have a really good reading, I would say on those changes. As you can see from their growth in their last quarter results. They grew a bit faster than Walmart and they seem to be on a good market share trajectory.
Deidre Woollard: As we turn to our last stock, it’s not a company that you would think of as a data company or a tech company in any way, but it 100 percent is. I want to talk about John Deere. This is a company that’s almost 200 years. You think if those green and yellow tractors, this doesn’t sound like an innovator. But they recently held their investor day and they went over some of the innovations they’re doing right now and it is fascinating. One of the things I found most interesting is in some ways, John Deere is a leaps and bounds ahead of other autonomous driving. Because if you’re in the field, you don’t necessarily have to worry about some of the things that you might encounter on the city street. But even more interesting for me is the kind of digitization of the farm and they’re taking this in a bunch of different directions. It’s things like mapping so that they can do precision application of seeds, pesticides, nutrients, all based on climate data, and micro-climate forecasting. They’re building really robust satellite tech so that they can feed all of that information to the tractors. Some of the tractors now they have their autonomy they’re totally running by themselves and they can pivot based on the information they’re getting in real-time and that’s amazing. They’ve got a lot of partnerships, over 250 connected software systems, all feeding in data, receiving data. It’s actually this massive tech network.
Other part that’s really interesting, that connects with that as they’re getting close to selling a million cameras every year. All of that information is going great into training AI, machine learning for making a better farm. Because farms are facing a lot of challenges, climate change obviously, but labor is a huge problem. Getting closer to robotic pickers and things like that. One of the things I thought was really interesting from that presentation, was it they’ve referred to the operation center as a digital twin of the farm. We’ve seen digital twins in the building space where you have a skyscraper and then you have a digital twin that exists and allows you to see using sensors what’s happening with the building and make changes without having to actually be inside the building. The same thing can be true of farms. What they talked about is creating the system of record in agriculture. All of this data comes in. Farmers can now see data from each other. It’s anonymized to avoid like competition and things like that. But it, all of it is around making better decisions about how they plant, when they plant, and how they use pesticides. All of that information is funneling into this. I think this is amazingly cutting edge. So Demitri, I don’t know if you’ve studied some of the like ad-tech stuff, but how do you think tech in general is impacting this and other farming businesses?
Demitri Kalogeropoulos: That’s pretty impressed by how much technology goes into their tractors right now and how much they’re applying that into the farming world, followed autonomous driving cars. That’s been very interesting. But like you say, the technology they’re applying to the farming process, they’ve got tractors that precisely understand where the planting happened so that it can calculate the exact next line to move down the farm. Small amounts here, maybe an entire half an inch here and there. But that really adds up when you’re talking about acres and acres and acres in terms of squeezing extra efficiency. If you can get an extra couple of percentage points of efficiency out of that, that would be a fantastic bonus for your yield. Just some of the AI uses and how they’re making things like the fertilizer and weeding and cultivation and then protecting the crop. All that stuff’s getting better with the application of these technologies and I think that’s an exciting thing for the Ag world. I think I’ve heard about they’re some companies that are focused on that, vertical farming and things like that, the indoor farming idea. But I think it can be easily forgotten when you’re looking at that thing that there’s actually an opportunity to make traditional farming a lot more efficient over time using these techniques. I think there’s a long runway for that to improve to.
Deidre Woollard: Yeah. I think it’s interesting. You mentioned the vertical farming companies, like there’s Bowery, there’s a couple of other start-ups that are doing interesting things. I think you’re right. Basically what we know is going to take all of that. It’s going to take vertical farming, it’s going to take optimizing fields. It’s going to take better distribution in grocery stores and reducing waste. It’s going to take consumer changes, things like Beyond Meat and making a commitment to eating, things that are a little more easy on the planet. All of this come together to really deliver this kind of picture of the future of food that I find just so fascinating. I think we’ve just scratched the surface here. So many other things I wanted to talk about with this, but thank you Demitri for your time. I really hope we can do this again. I think this topic is so vital for investors and just anyone who eats to understand. Thank you.
Demitri Kalogeropoulos: Thank you. Yeah. I had a great time.
Asit Sharma: As always, people on the program may have interest in the stocks they talked 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. I’m Asit Sharma. Thanks for listening, we’ll see you tomorrow!
Asit Sharma has no position in any of the stocks mentioned. Deidre Woollard has positions in Goldman Sachs and Walmart Inc. Demitri Kalogeropoulos has no position in any of the stocks mentioned. Maria Gallagher has positions in Chewy, Inc. The Motley Fool has positions in and recommends Beyond Meat, Inc., Chewy, Inc., Coinbase Global, Inc., and Goldman Sachs. The Motley Fool has a disclosure policy.