In this podcast, Motley Fool analyst Tim Beyers and host Dylan Lewis discuss:
- Chipotle‘s historic 50-for-1 stock split and why the burrito-maker still has plenty of growth ahead of it.
- Apple and Alphabet‘s talks to bring Gemini to the iPhone, and why it’s a no-brainer for both businesses.
Motley Fool host Mary Long caught up with Lauren Sherman, a fashion correspondent at Puck, to talk about Abercrombie and Fitch‘s turnaround and epic 2023.
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 March 20, 2024.
Dylan Lewis: You can split your burrito, why not your stock? Motley Fool Money starts now. I’m Dylan Lewis and I’m joined over the airwaves by Motley Fool Analyst, Tim Beyers. Tim, where we add on the caffeine meter?
Tim Beyers: Fully caffeinated, ready to go, really hungry for a burrito.
Dylan Lewis: You’re going to have to make it through this episode. I think it’s going to be a little hard. We’re talking splits in the food business, including a zoom in on Chipotle stock split. The next-generation of famous tech partnerships perhaps, and an apparel brand that is sneakily one of the best stocks of 2023. We’re going to start with the burrito talk though. We’ll get your hunger pangs over with early here, Tim.
Tim Beyers: Alright.
Dylan Lewis: For the first time in the company’s history, Chipotle will be splitting its stock. This week the company announced a 50 for-1 stock split. I don’t know if that number caught your eye, Tim, but I think that is one of the largest stock splits I’ve ever seen announced.
Tim Beyers: I’ve never seen one bigger than that. I’ve seen in the teens, but I’ve never seen one bigger than that. I’ve seen 10 for-1 before, 50 for-1. No, I’ve never seen that and it provides a huge amount of liquidity to the market for Chipotle shares when this completes. You’ll be injecting way more shares into the daily average volume, which our colleague and friend Jim Mueller, will tell you is very good for making an Options market and Chipotle shares. Stay tuned to hear Jim talk about that probably on the discussion boards.
But I think this is very interesting. It just creates a more liquid market for Chipotle. It certainly if you’re a longtime Chipotle shareholder, you’re going to suddenly looking at your brokerage statement in a few weeks and see a whole heck of a lot more shares, nothing has really happened. But I think it is an acknowledgment that the demand for ownership in Chipotle is probably higher than it’s been in a long time and that’s because it’s a good business.
Dylan Lewis: A few companies could have a 50 for-1 stock split, even make sense with their share price and we know it’s an academic thing, it’s a matter of pizza. Do you want two pieces of a pizza cut in the eighth or one piece that’s been cut in the quarters. When it comes to stock split outside of the options market, I think for us Tim, it provides an awesome opportunity to just reflect on how amazing the company performance has been particularly, over the last decade.
Revenue doubled since 2015, net income basically tripled since 2015 and along the way, they have basically been able to become one of the best-in-class in terms of mobile. One of the best-in-class in terms of rewards program, they’ve weathered consumer food issues. It doesn’t seem like there’s been anything that’s been able to stumped the growth of this business and they continue to be really the industry standard and fast casual.
Tim Beyers: I agree with that. The only other that I would say compete with them in terms of restaurant-level economics would be like a Chick-fil-A. Chick-fil-A is absolutely outstanding, but I would say those two are really wanted to and pick who you like better between those two. The interesting thing with Chipotle is they still have room to grow. There are still ways that Chipotle can expand its business. We’re still very early, for example, Dylan in the roll-out of what we call Chipotlanes.
That’s the drive up. Chipotle has done all this amazing growth by being a business with locations that you walk into and you assemble your burrito or your bowl or whatever it is that you are ordering. That’s been driving the business for years. Now Chipotlanes are starting to take off here as we grow the total restaurant footprint. We could probably still double the number of Chipotlanes here in the United States. But what we could do beyond that, is take existing Chipotlanes and put more Chipotlanes on them.
I think the growth story here, Dylan would be that the volume of business per-location that Chipotle can do, is still on the low end of what we have seen. Think about that. If you have a Chipotlane, whether Chipotle and your restaurant level activity can maybe, I’ll make up a number here, could be up by 50%. That has dramatic networkwide effects for a system of company-owned stores that isn’t fully optimized. That is bonkers, and this has been such a high performing stock. To think about that, the only question is, how much of that is priced in? I would say probably some of it, because it’s a premium price stock, but also probably not all of it, probably nowhere close to all of it.
Dylan Lewis: You anticipated one of my questions there. We are looking at this now at an 80 dollar billion company and yet, most recent quarter comps grew 8%. Despite the incredible footprint and how mature a lot of their restaurant footprint is, they are still performing. It seems like you still see growth ahead. On the volume side, I have underestimated this business and its future growth to my own detriment. I sold roughly a 10 bagger ago, back in 2017, missed out on a ton of gains. I’m curious, is there anything that you see emerging as a risk or something that could go wrong in the Chipotle growth story?
Tim Beyers: There’s no question. It’s an increasingly digital business. So if you ruined things on the digital side of the business, if you somehow figure out a way to screw up digital ordering or the app gets hacked or do you just have bad experiences that make you want to order somewhere else like that’s it, I don’t want it and that could really harm things. You could have another health scare and that’s certainly something to watch out for. You could also play really poor games with the balance sheet. You could decide you expand irresponsibly.
You take on unsustainable levels of debt, for example and then you build out in all of the wrong ways, and then you have to retrace, maybe sell locations. There’s a lot of things that could go wrong here. But I think what we’ve seen from Chipotle at least more recently, is that they are responsible in how they figure out growth. Here would be the signal to me, Dylan, if they’re going to continue to do incremental things that have asymmetrical benefit, I think we’re fine here. Something that fits that category of something, whereas an incremental change that can provide asymmetrical benefit is something we’ve all been waiting for. Where’s the breakfast burrito, Chipotle. Where is it?
Dylan Lewis: We want breakfast burrito.
Tim Beyers: Where’s the breakfast burrito? Because you’ve got the Chipotlanes. That is the perfect place to make an incremental menu change, that could dramatically increase volume if done right. But Chipotle has a history of not rushing into these things, which I think is right. That’s a very conservative use of capital in order to be able to grow responsibly. As long as they keep on that path, Dylan, I think we’re fine. They can make incremental changes that give you asymmetrical benefit. If instead, you see a lot of all-in bets, maybe let’s pump the brakes a bit.
Dylan Lewis: I love that you answered my risks question with basically by the way, they still have breakfast burritos and they’re back pocket.
Tim Beyers: Yes.
Dylan Lewis: As a growth lever. Just in case you forgot. Tim, our final story in our News Roundup segment for today, Apple and Google parent Alphabet, have a deal in place when it comes to search defaults on the iPhone, why wouldn’t they explore something similar in AI? We have reports out that they are in talks to use Google’s Gemini to provide generative AI and other capabilities in Apple’s iPhone. My immediate reaction to this, Tim is, are you surprised Apple isn’t trying to home-grow any of this?
Tim Beyers: No. They almost never do that. They will do some home-grown things, but generally what they’ll do if they’re going to make a tuck-in piece of technology, they’ll do an acqui-hire. They’ll, they’ll buy a small company that has some really interesting technology. They’ll buy them out, but bringing the people and then they’ll build it into their ecosystem. But they do partnerships all the time. They’ve done it for years and in this particular case, they have a long-standing partnership with Google. But here’s the heartache I have for this, it would be surprising if Apple didn’t do this because here’s what you get.
This has nothing to do with Gemini technology. Honestly. I think it has 0% to do with Gemini’s technology. You know what it has? The answer to what this has to do with is money. This is what happens when you are a company with a massive balance sheet. In this particular case, I’m talking about Alphabet. Alphabet can absolutely afford to pay Apple whatever Apple wants to make Gemini the default AI on iPhone to their buying distribution, which gives them time and data to improve Gemini using one of the largest data-gathering networks in existence on the planet today, which is the iPhone network, which is amazing.
I think this is an incredible deal for Google. They’ve got the money to pay for it. They have the existing relationship. For Apple, it’s just more money in their pocket. What do they care? They know that it’s early in the AI development. You don’t have to have a perfect AI, no one’s expecting that. Here’s the thing, for OpenAI, which has a lot of bargaining power, they’re exerting some of that.
It is more expensive to use GPT for now than it was to use GPT-3.5. You think GPT-5 is going to be any cheaper? No, it is not. You think Apple wants to be subject to whatever terms that Microsoft, which has leverage over OpenAI want to impose on Apple for getting GPT onto that phone? You think Apple wants any piece of that? I think the answer to that Dylan is no. This is a no-brainer. Anyone that’s surprised by this, I think isn’t paying close enough attention.
Dylan Lewis: To your point on the dollars there, we’ve seen through filings that Google reportedly paid somewhere in the apprehood of $18 billion to be the search default.
Tim Beyers: Yes.
Dylan Lewis: On the iPhone. I think that was back in 2019. We can only imagine that sticker price for that has gone up and being the default when it comes to generative AI will also go up. I look at this news and I think about how on this very show we have talked about some of the missteps with Gemini, and they’ve been very public. They’ve gotten a lot of scrutiny for that, and I almost think, you know what? This lets Google pave right over those if they want to.
Tim Beyers: A million percent. Let’s remember, Google is getting hammered more than any other company that has a beta would get hammered. Because we expect more of Google. We’ve become so dependent on the Google machine, and we expect it to be good that if Gemini was from another company and it was labeled as a beta, we wouldn’t give that company nearly as much stick as Google has been getting for Gemini because we’d say, it’s a beta, it stinks right now, it’s going to get better.
But Google doesn’t get that grace because it’s Google. Now having said that, it has been bad, it is the definition of a bad beta. But yes, this is what happens, Dylan, when you can write massive checks that allow you to fix problems, look what happens.
You write big checks and you get distribution, and I will tell you, that distribution and the amount of data that Google gets access to by virtue of that distribution is going to help Gemini evolve in a big way. I cannot predict that it’s going to be as good as the GPT model. But this is a good step in the right direction for Alphabet, and they got the money to do it. Apple, they know that they’ve got the leverage here, you can bet that Tim Cook has just got Apple and Apple shareholders got paid, they got paid.
Dylan Lewis: Tim, always love getting your take on tech. I’ll set you loose so you can go get that burrito. Thanks for joining me today.
Tim Beyers: Thanks, Dylan
Dylan Lewis: Coming up, one of the best-performing stocks of the past year is nowhere near the tech sector. My colleague, Mary Long, caught up with Lauren Sherman, a fashion correspondent at Puck to talk about the Abercrombie & Fitch turnaround
Mary Long: Lauren, I want to start with the story of Abercrombie & Fitch in the investing world and honestly maybe outside of it too. The name on everyone’s lips has been Nvidia. Might be surprising to know that in the past year, Abercrombie of all companies has outperformed this chip maker.
Lauren Sherman: It’s crazy.
Mary Long: It’s crazy, I’ll give numbers to back it up in case there’s anyone doubting me, but the retailer stock is up 373% compared to a year ago, Nvidia is up about 270%. My question for you, what’s been happening over at Abercrombie?
Lauren Sherman: I’m sure you know, and we all know, retail is very cyclical, and so a retail stock can be doing really well for five years and then doing really poorly for 10 years because the consumer is just not into the pair of pants that a brand is selling. But a couple of years ago, Abercrombie totally changed its strategy. It was always relying on heritage to be cool with teens. The idea was, let’s make it really preppy. In the 90s and 2000s when Mike Jeffries, then CEO, turned it around, he made the preppy cool heritage into something that was also sexy, which is creepy when you’re thinking about teenagers.
But it was very like the Bruce Weber black and white photos and it became iconic, really popular among preppy teens, doubling up polos, things like that. Then in the 2010s, as the consumer world changed and they were just more brands, more direct-to-consumer brands. There was just way more competition. Teenagers backed away from Abercrombie. They were shopping at places like American Eagle one of Abercrombie’s biggest competitors, but also fast fashion, ZARA, H&M, as well as places like Brandy Melville. Teenagers had way more options and they just didn’t care about this idea of preppy heritage done in a modern way.
At some point, Abercrombie board hired this woman named Fran Horowitz, who longtime retail executive, grew up at L Brands, which was the big company that owned Victoria’s Secret, and at one point also owned Abercrombie, but Abercrombie was spun out in the 1990s. They hired this woman, Fran Horowitz who has a very good reputation for merchandising. She fired a bunch of people and she decided, I’m really going to focus on product. She knew she wasn’t going to beat out the fast fashion players with speed-to-market.
So she decided, what are the things that an Abercrombie should be doing really well from a product perspective? Let’s forget about the preppy heritage stuff. Abercrombie made jeans, they made plaid shirts, they made all of polo shirts, all this stuff that was known. They did it through this preppy heritage lens. She threw that all out the door and just made really cool jeans, really cool plaid shirts, really cool sweatshirts and stuff that actually the TikTok generation really love. I actually walked into an Abercrombie probably six months ago.
An Abercrombie in Southern California and in the Eastern suburbs of Los Angeles, and you look on a rack and there were all these blazers in pastels, which were very trendy a few months ago. In a printout paper on the rack, it said as seen on TikTok. She just really went in and forgot about the heritage, forgot about the brand. It’s the opposite of what brand-building 101 would teach you. She just forgot about that stuff and decided to make really good product that people would love.
The jeans in particular, which are super cheap, also, have just become so popular among teenagers, yes, but also up and people up into their 40s are into these jeans. They fit really well, they look good, they’re modern style, and more than anything, she’s just got the product right. Even with all that, I am still amazed at how well the stock has done and also how well the business itself has jumped because it’s not easy to maintain that momentum in retail, especially now, as I said, with so much competition in the space.
Mary Long: You mentioned the jeans. What got me interested in the story was that truly every time I complimented one of my friend’s jeans, they would go with a look of, can you believe it on their face, they would say they’re Abercrombie and scoff a little. Because, and you make this point that can you believe it face came from the fact that in my memory, Abercrombie was this preppy heritage brand and what Fran’s gotten right that shift in style as you mentioned.
But I think what’s also impressive to note is not just addressing a change in taste over time, but also Abercrombie not that long ago, was hated and was going through a lot of PR trouble. In 2016, they had the honor of being designated America’s most hated retail brand by the American Customer Satisfaction Index in 2022, I think Netflix released this white-hot documentary that highlighted the very exclusionary marketing and hiring practices of the company. How low was the low point in terms of brand perception for Abercrombie?
Lauren Sherman: Well, I think one thing to remember is that Americans love a redemption story so going that low and coming back so high, I’m not totally shocked. The Americans love to bring someone back from the brink. But I would say with consumers, it was really disliked. With a lot of these mall brands that were really big in the 80s, 90s, 2000s. Most of them just lost touch with reality, and I would say Abercrombie and Victoria’s Secret, which used to both be owned by retail Magnate, Les Wexner. They both in the mid-2000s, they had marketed themselves through the male gaze. The idea of what was sexy, what was interesting, what was attractive could verge on a level of misogynistic.
Especially with with Abercrombie and the CEO Mike Jeffries, there were just a lot of things he said, at one point he made a comment that they just weren’t going to ever do extended sizing because it was supposed to be an aspirational brand, Victoria’s Secret, same thing, no extended sizing. In the mid-2000s, in the height of the MeToo Movement that just no longer flew with consumers. I think we’re just generally disgusted by Abercrombie.
The way consumers talk and the way that they consume are different things. I’ve been covering this industry for 20 years and people rarely vote with their dollars. We think they will and they say they will, but they actually don’t. What it comes down to, it’s a price value equation always. If there is a product that is really good and you are able to find that product and you think it’s good for the amount of money that it is sold for, then you will buy it. They were pretty hated, but I would say that what it comes down to is that can flip so quickly that if you’re making something good that people like, they will easily forget about all the bad stuff that happened.
Mary Long: If you’re an executive at Abercrombie or another retailer, how do you keep not just keep a pulse on what the consumer currently ones, but also get a sense of what is coming around the corner so that you’re not left behind when trends and styles do change.
Lauren Sherman: Well, it’s next to impossible. If you talk to her retail executive now they’ll say they use predictive analytics and AI, et cetera. I got to say it’s not that different from 1985 when the retail CEO would call a store at the end of the day and say, how many units of such and such item that we sell. You have to have a sense. The AI and the algorithms can give you a sense of what’s going to happen next, but you really don’t know.
What you need to do is get your business in a place with the right amount of inventory, the right amount of product, that if you have an off-season, which they all, you are going to have an off-season, then you’ll be OK. What ends up happening a lot is if a retailer as a really big hit, they’ll buy too much of it and then they get leftover with it when it’s not cool anymore. What I think Fran Horowitz has done, is she’s just been very thoughtful about watching the market and what people want. You think about this gene that has done so well at Abercrombie, it’s not a skinny gene and you hear all the other retailers talk about their genes even up until a couple of years ago, they were like we’re going to stick with skinny jeans because they’re selling really well.
But the reality was people were looking for something a little bit more relaxed and with a wider leg openings. Abercrombie got on that very early. I bet the first couple of seasons of that gene that everybody’s wearing, it didn’t sell super well, but they realized that that’s where it was moving. I think the challenge and the goal is to be a little bit ahead and understanding of where the consumer is moving while maintaining the hero products and making sure that your inventory on the stuff that’s selling really well is not crazy. Because then next season when a new product is popular, you can really ramp that up and go wild on that.
She has just done a really good job. There are not that many great merchants or gain retail now. It does require ripe brain, left brain, and a lot of instinct and that is scary to people who are trading on the public markets. Like you live and die by the quarterly report and doing something on your gut that’s risky is not something that you want to communicate to shareholders. It’s wildly impressive and every quarter I’m just like why? Wow, because the whole idea has always been maintain your brand ethos and your brand DNA and that’ll see you through. But what we’re finding is that in this current reality that may not be true.
Mary Long: Abercrombie reported Q4 earnings in early March. On that call, Fran Horowitz mentioned building out a new segment for a wedding guests a more formal line. She also said, quote, there is no finish line and we see tremendous growth ahead. That finish line, there is no finish line. That’s what’s interesting to me. Apart from this step into formal attire, what are you hearing about Abercrombie’s next steps?
Lauren Sherman: The whole thing I’d say the chatter among retail executives is how how long can this last. No Finish Line. Good for her, but I think it’s interesting because she’s positioning it as more formal wear for weddings and things. But what I would say and look at any retailer trying to get into the wedding space and never works. They always end up backing out of it. But what I will say is there is this pseudo returned to dressing up.
Vanessa Friedman just wrote about this in The New York Times. I was just said all the fashion shows in Europe and everything is very polished. The return of the dress, like a dress. It’s so funny to talk about items that we have millions of inner closets. But think about when was the last time you were address? I barely wear dresses anymore. Used to wear them constantly. It feels like it’s time for people to wear dresses again, the mini skirt was really big for a few years, and now feels like it’s coming back to dress era.
It’s interesting because I think what she’s saying is people are going to start dressing up a little bit more. By no means do I think people are stop wearing jeans that people aren’t going to wear leggings every other day. That stuff, the casualization of our culture is here. But I would say that we will see, occasionally, people making an effort to dress up a little bit because we’re really out of the pandemic lockdowns now. It’s been four years since the pandemic.
We’ve had spikes of people buying stuff starting and stopping and the economy up and down. Say now, it’s going to go back to normal of how people dress up and what they wear. I’d say that there probably is an interest in buying stuff that’s a bit more formal. We saw it first with the return of the blazer and blazers with jeans. But now I would say that it’s going to be dresses. She’s positioning it as a formal wear thing. I’d say it’s probably more just women are going to want to wear, people are going to want to wear dresses more. She one of the few great retail executives working today. It really is remarkable what they’ve done.
Dylan Lewis: As always, people on the program may own stocks mentioned in the Motley Fool may have formal recommendations for or against, so don’t buy or sell anything based solely on what hear. I’m Dylan Lewis. Thanks for listening. We’ll be back tomorrow.
