In this podcast, Motley Fool analysts Dylan Lewis and Nick Sciple discuss:
- Piper Sandler's Generation Z survey about brands and spending.
- Tailwinds for Ulta Beauty, Spotify, and Nike.
- Investing in resale companies.
- How the competitive landscape shifted for upstart brands.
Motley Fool producer Ricky Mulvey and Motley Fool analyst Sanmeet Deo look at two health trends for investors to watch.
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.
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This video was recorded on April 6, 2023.
Dylan Lewis: The kids are all right with big brands, Motley Fool Money starts now. I'm Dylan Lewis sitting in for Chris Hill and I'm joined by Nick Sciple. Nick, how are you doing?
Nick Sciple: Great to be back with you, Dylan. Always great to be back in the podcast world.
Dylan Lewis: Yeah, love to have you. Today we are diving into the taste of Gen Z, Piper Sandler's semiannual Taking Stock With Teens report just published and it is a gold mine of insights about the spending habits and the dominant brands for the next generation of consumers. Just as background, the firm's surveyed 5,600 teenagers in 47 states, digging into the top brands by category, clothing, footwear, you name it on the consumer side, and they also get a sense of the celebrities and the causes that resonate most with younger folks. Nick, when you look at this report high-level, what jumps out to you?
Nick Sciple: Yeah. A few things. High-level, A, teens still spending money in this slowing down economy where you see maybe pressures on some retailers still seeing teens spending self-reported up 2% year over year within that context, teens still spending but spending in different channels. One channel I've been watching in particular is the secondhand channel. I see over 200 basis points increase in preferences year over year. That's something if you were paying attention back in January, the National Retail Federation held their big show every year for all big retailers across the country. One of the big areas of growth highlighted among those folks was resale expected to grow 3 times faster than core retail moving forward. A lot of that being driven by preferences among younger folks, Gen Z, things like that. Also, as far as brand preferences, it's just that the big brands that you would expect to be dominant continue to dominate. So if you look at the top five most popular e-commerce websites, obviously Amazon coming in at No. 1, but also interesting to see companies like Nike and Lululemon through their direct-to-consumer channels, really having lots of success. Apple still remains the dominant smartphone. You have 87% of teens report owning an iPhone, 88% of them expect to own an iPhone next year. The kids generation, we're addicted the millennials to the iPhone. It looks like Gen Z is addicted as well.
Dylan Lewis: Yeah, that is such an interesting story to me because you emphasized the big brands there and I know when I spend time talking to my younger cousins that are in their teen years, there are times where I have no clue what they're talking about and other times where the foundational elements of how we live our life or the way that we look at the world is very similar. I look at some of the names on this and the leaders in some of these categories. You mentioned Nike, Apple, Amazon, Netflix, and YouTube leading the way in terms of video habits, and I think it's a good reminder if you're trying to be somewhat somatic and how you're looking at things like this and how you're trying to apply it to your portfolio. You don't necessarily need to be awarded style points or points for difficulty when you're trying to project what the future looks like. Very often, a lot of these brands that are incredibly resonant with millennials, with Gen X, are also resonating with Gen Z.
Nick Sciple: That's right. I think Lululemon really, its path to success was going from among those college folks and now it's broken into really the adult population. Sometimes you see these big trends carry over from the younger generation to the older generation and vice versa. You've seen a lot of preferences too among the younger folks around loyalty programs. That was one thing called out, Ulta really dominant in the makeup and skincare part of the category. We've got 60% of teens reporting an Ulta membership. When you really capture those folks, it's really hard to get out of the ecosystem.
Dylan Lewis: Probably not a surprise for anyone that's been an Ulta shareholder. That's a business that has been pretty strong one to own and a pretty successful one. I want to focus a little bit on some of these businesses like Apple and I'd even lump Spotify and Netflix to a certain extent into these categories where these are businesses that you make a decision once and very often you tend to just live in that decision for a very long time. I think about my own path with a business like Spotify. I became a user probably about nine or 10 years ago. Had been a paid user for probably six or seven years, and I have not once thought about my subscription since. Nick, I'm curious when you look at the names and the habits that are being formed with some of these brand associations. What you see and just what it portends for some of these businesses?
Nick Sciple: Yeah. Well, I'll say my experience with Spotify is pretty similar. They grabbed me as a young free user and I got annoyed with the ads and I've been a paid user ever since. I think if you look at something like music where really all the platforms have everything you could possibly want. Once you get into a platform like Spotify, they start serving up playlists to you and making recommendations to you over time. It gets harder and harder to get out of these ecosystems. Another thing that I think is interesting, I alluded to the direct-to-consumer side of these businesses before, as the e-commerce side of these businesses get stronger and stronger, I think you're going to see companies like Nike and Ulta have even more dominance in their industries as folks form loyalties early in their life. The other thing that I think is interesting is over the past 7, 8, 10 years, you've seen this big trend of new entrants in apparel retail and you think about your Allbirds types companies, and a lot of those companies were able to flourish in a low interest rate environment and an environment where it was a lot easier to target advertising and I think just the competitive landscape today is even more in favor of these big brands that maybe it would have been five years ago.
Dylan Lewis: Yeah. If you're in a tight budgetary environment, a business that already exists in your brain is going to have a little bit of an easier time being there when you're trying to make a purchase decision as a consumer where some of those upstart brands, they need to do a lot of education. They need to do a lot of awareness for you to even think about them when it comes time to buy new yoga equipment or new set of footwear or whatever it might be.
Nick Sciple: That's right. You've seen the Lululemon get involved in footwear. You've seen some of these brands will be able to extend their offering to take that mindshare and be able to gobble more of the addressable market.
Dylan Lewis: Nick, you mentioned trends in resale and secondhand before. I want to touch back on that because I think that is something that we've seen bloom over the last 5-10 years and we didn't really get too much into the investable side of that earlier in the discussion. For people that are interested in following that trend and are looking for ideas to get exposure to it, anything comes to mind?
Nick Sciple: Yeah, well, I think that the resale industry certainly is seeing lots of growth in recent years. We've seen some companies come public, Poshmark has come public and then since been taken private. ThredUp came public, has really had a really tough time in the market. When I look at the investable companies in the resale space, they're really the only one in the pure-play role that comes to mind for me is company called Winmark, ticker is WINA, it's been a recommendation in the Canadian side of Motley Fool for quite a while there. A franchisor of a number of resale concepts, Plato's Closet, Style Encore, Music Go Round, Play It Again Sports, among others. As a franchise business, they get a percentage of sales from their franchisees, a low single-digit percentage of sales, and as a result, the margins on this business are really remarkable. The company has been public since the mid '90s, has been a really an amazing performer. They take all that cash that comes in and for the most part, they just return it to shareholders. They buyback a heck of a lot of stock, send out a special dividends. Just so far this year the stock is up almost 40%. Valuation maybe is getting a little bit aggressive here, but they're one of the few companies that has been able to figure out the resale business in a really profitable way. We may see some new entrants, some of these bigger retailers try to get involved in the business, but Winmark's really a company that's proven out this business model over 20-plus years and I think they'll still be able to do it going forward the next 10.
Dylan Lewis: Yeah. I think that's a compelling trend and one that just regardless of where my investing dollars are as the human in me, that the consumer in me wants me to see businesses succeed that are trying to do that because there's a lot of value left in close that people have decided they're no longer going to be wearing. It's nice to see reuse, resale be a trend that is on people's minds. Before we wrap up here, Nick, anything else from this report jump out to you or any other names that you want to surface for listeners?
Nick Sciple: Yeah. A second company that though I'd put on listeners radar is a company called Aritzia. If you drive into some of the trends within the Piper Sandler report, among the top brands starting to be worn among teens, Aritzia is starting to move up that chart. Aritzia is another company that's recommended on the Canadian side of the Motley Fool services, the ticker is ATZ on the Toronto. Stock exchange, has some parallels actually with Lululemon who we talked about earlier. Both founded in Vancouver. Both companies they really expanded across Canada and have increasingly become not just Canadian businesses, but North American businesses. As of the most recent quarter, Aritzia just ticked over to over 50% of its business in the United States as opposed to Canada. Looking forward to the next five-years, they expect to open 8-10 stores per year. Expect that to trickle down to about 15-17% sales growth per year, and a faster rate than that of earnings-per-share growth. The stock trades at about 25 times earnings which I think is very reasonable. Relative to that opportunity I just laid out for you for growth, I think if this company traded in the US, the multiple would be over 30 times earnings, but that kind of smaller investment environment gives us the folks that are willing to invest in Canada an opportunity to get a growing company at a reasonable price.
Dylan Lewis: So we have a couple names that maybe people aren't as familiar with and the reminder. You don't have to think too hard about it. A lot of the businesses that you think are quality businesses and good services are probably going to be around for quite some time based on the survey results proceeding there.
Nick Sciple: That's what it looks like. The kids are all right, Dylan.
Dylan Lewis: Nick, thanks for joining me.
Nick Sciple: Anytime.
Dylan Lewis: We've got more trends, more discussion of Lululemon on the second half of the show. At Home Fitness is evolving and Pickleball is on the rise. Ricky Mulvey caught up with Motley Fool Senior Analyst, Sanmeet Deo to look at two health trends for investors to watch.
Ricky Mulvey: At Home Fitness is changing, but joining us now to talk about two health trends for investors to watch. Motley Fool Senior Analyst, Sanmeet Deo. Sanmeet, good to see you as always.
Sanmeet Deo: Hey, good to chat with you.
Ricky Mulvey: Let's talk about connected fitness first. During the pandemic, the pendulum swung very far to at-home fitness with equipment. Where is that pendulum swinging now?
Sanmeet Deo: It looks like the fitness pendulum is swinging more to the omnichannel fitness model where fitness companies are meeting their customers where and when they want to work out. As the pandemic shifted a lot of our lifestyles in different ways, the fitness needed to adapt. For example, many of us have a hybrid work schedule. So sometimes people want to work out at home maybe before they go to work, or when they're working from home, work out at home, or sometimes they want to work out at or near the workplace. Where we work out has definitely changed from the past. While at-home fitness was always a thing before the pandemic, I think the importance of it and the value of it was more appreciated during the pandemic, and it's going to continue maybe at less levels though than prior.
Ricky Mulvey: You're starting to see companies adapt. Lululemon's latest quarter. Investors cheered as it beat earnings and revenue expectations. However, it did write down its Mirror acquisition to about one-tenth of the original purchase price. That was the Mirror where you could see yourself in workout classes in your home. What are the lessons that CEO Calvin McDonald learned from that experience? Do you think Lulu is learning the right lessons from this write-down?
Sanmeet Deo: In addition to all those, Lululemon showing us an example of how sometimes acquisitions are a tough thing. They purchased Mirror for 500 million in June of 2020. The goal of their acquisition was to make Lulu more of an experiential brand, expand its digital and interactive capabilities, take advantage of the exploding in-home fitness market. The acquisition was quite a substantial one for them given that they had about 800 million in cash on hand at the time. In retrospect, it looked like they bought a fitness company at its peak, sales weakened quickly after, ultimately resulted in them in writing off about 442 million of the acquisition in it's most recent quarter and shifting to primarily digital offerings. I think a big lesson that the CEO Calvin McDonald and Lulu must have learned is that connected fitness, especially hardware and software, is a much bigger undertaking for a company that has primarily delved into the athletic apparel market. While they do great at that, and while there may be some synergies to having hardware and software brand that could help them sell some athletic apparel, maybe a better approach might have been testing the waters without a big splashy acquisition. Now that they're shifting to a more digital offering like Peloton and many others, and while there is, in my opinion, over-saturation of digital fitness apps, they're doing something a little bit different by partnering with some other more well-established digital fitness companies to offer their classes on their own Lululemon Studio offering. So I think they've learned a little bit of a lesson of the connected fitness market, but it might have been a better approach to do what they're doing now back then to dabble in slowly offering digital without having that big purchase.
Ricky Mulvey: Yes. The strategy now it's called Lululemon Studio. The Mirror still exists, but they're investing in getting this lower-cost offering to folks where they can watch workout classes on their phone, you can do it at the gym, you can do it, wherever. I think two of the lessons from this for me are, number 1, be careful thinking in absolutes. I think there is a lot of interest in this idea that no one's going to work out at the gym again. Then also a lot of investors are not health experts. Working out in your home or apartment by yourself is not fun, [laughs] it's not what I'm trying to do the whole time. Going beyond that, what are some of the applications of this connected fitness, this saturated market that you're talking about, that you think have potential? Are you excited about it or is this a wait-and-see approach to see who breaks through?
Sanmeet Deo: I think the thing I'm most excited is about smaller hardware offerings that offer comprehensive digital analytics softwares that help customers really put numbers behind their fitness and health. I don't think people want to buy big bulky equipment in their homes anymore, especially when they're not in their homes as much as they were in the pandemic. The smaller hardware products, something like something I came across, Kabata, which is smart dumbbells that offer real-time metrics, AI powered workouts, and specific tracking to enhance form and technique. So those kind of things might do well. Kabata, to give it a perspective, it's like those Bowflex dumbbells where you can change the weights around. Or things like FightCamp, which offers a standing heavy bag, not huge but that helps you. They have digital classes, they have an ability to track your punches, your calories, things like that, and then I still believe in the limitless potential of smart watches that are just tracking more and more fitness and health metrics to keep tabs on. But small hardware that you're not going to hang your dirty clothes on is basically what I'm most excited about.
Ricky Mulvey: Smart hardware, you're not going to, that's fine. Any companies besides Lulu that you think understand this new style of fitness in a compelling way?
Sanmeet Deo: The name I've been hammering down everybody's throats that's a Fool listener is Xponential Fitness. Mainly because I just believe that they're doing the omnichannel approach in the best possible way. They have small studios that offer numerous fitness classes among a variety of modalities that are staples, yoga, Pilates, cycling, barre, boxing, things like that. But they also have their digital apps that offer many of those similar classes on an app. They also have an XPass, which led to use the digital app, but also try out different brands among the Xponential Fitness platform. They're combining all of that, and they're meeting customers where they are in terms of where they want to work out.
Ricky Mulvey: I look at Xponential too. Two things that I'm concerned about. One is that goodwill and other intangibles makes up $300 million of it's almost 500 million of assets. It's multiple expanded over the past year exploded. It now trades at about a 34 PE ratio. Year ago it was at 11.
Sanmeet Deo: Being a franchisor, it doesn't take on the capital intensity of opening the studios and all that, that's the franchisees. So as a franchisor they are going to be a lot more asset-light and a lot of their assets resides in the brand names and the trademarks and the acquisitions of brands that they've done. So that's one of the reasons why you see such a high goodwill and the intangible portion of their asset base. So while it can look a little concerning, I'm not too concerned so long as their brand name is strong and it continues to do well. In terms of the multiple, I think their metrics have been good over the past few quarters. They've survived the pandemic very well versus other fitness companies. They're expanding their studios, they're expanding their brands that they have to offer. Their metrics have held up very well throughout and so I think the name is just gaining more prominence, and so the valuation has grown their potential for revenue growth, cash flow growth, margin expansion is still a little bit underappreciated going forward because I like to look at these companies on a five-plus year basis and I model them out as such. So I'm still very confident in the company and its valuation on an out-year basis.
Ricky Mulvey: Let's move on to pickleball. That's probably the hottest health trend in the streets. Study from YouGov found that 14% of Americans played pickleball in the last 12 months. You follow health trends. Is this one with legs or is it a flash in the pan?
Sanmeet Deo: Well, in full disclosure, I am a pickleball player and I've been playing about two, three months now with some friends every Sunday we play. I was laughing when I first heard about pickleball, but then when you finally actually play, it's surprising, very addictive, fun, and doable for all ages and all demographic groups. I think it's here to stay. One of the things that really tells me that it's here to stay is the demand outstrips to supply. There's more than 36 and a half million people who play pickleball from August 2021 through August 2022 according report by the Association of Pickleball Professionals. There's only about 10,320 places to actually play in the United States. I've noticed anecdotally that these courts are packed. You have to book them a week in advance and I'm in long island where there's not that many indoor places to play. There is outdoor places to play if you put the lines on tennis courts. But then there has been some controversy with tennis players and pickleball players saying, hey, get your own courts. But I think it's here to stay.
Ricky Mulvey: Luxury gym chain Life Time Fitness, thinks Pickleball is going to be their growth engine for their very large fitness centers. What's the strategy there for Life Time?
Sanmeet Deo: When I think of investing in the pickleball trend in the public market Life Time is one of those ones that comes to my mind. First, they've deployed about half $0.5 billion into pickleball. At 120 of their more than 160 locations, they have about 400 courts across their clubs currently, they're hoping to have about 600-700 by the end of 2023. Participation, they said is up tenfold in the past year, and even pro leagues like the major league pickleball and Professional Pickleball Association, PPA, I think it is.
Ricky Mulvey: 4-5 times fast.
Sanmeet Deo: Have partner with them to host tournaments. So they're going in on it.
Ricky Mulvey: I do wonder if this is the new AI buzzword in the health industry for Life Time Fitness. I think they have a great product, I've been to their gyms in the past. But I also question management's ability to deliver on promises. Back in 2021, in their S1, management set a goal of 30% return on invested capital in its S1 for new fitness centers. Boy, does that sound high? In quarter 4 of 2022, its return on invested capital was negative 5.5%. Sounds to me like a new year's resolution gone awry.
Sanmeet Deo: I do like Life Time. I like what they're doing as a customer. I think it's pretty cool. They're trying to be a luxury athletic club, almost like a country club, I should say. But one of the issues I have with Life Time is they spend a lot of money and it takes a lot of money to maintain those clubs, build those clubs. Things like with pickleball investing in maybe different new trends and changing things up constantly. They're not a franchise company, they're a company owned by shareholders and the owners. So they're going to continuously have to put in money into their business and their returns aren't going to look as good as some other asset-light type companies.
Ricky Mulvey: I also think it's interesting where you're seeing the pickleball froth show up on TV, one of the professional pickleball associations, excuse me, the professional pickleball Association is sponsored by Carvana to me that might be a little bit of a symptom of froth. To the association, I'd encourage you to clear those checks quickly. Do you think that's one symptom of froth or do you think it's more widespread throughout the industry with pickleball?
Sanmeet Deo: As an avid fan of pickleball playing, I had been skeptical about viewership of pickleball and how much that will become. But an interesting thing too is lately, recently they had the first annual pickleball slam. I don't know if you heard about this and it included McEnroe, Agassi, Michael Chang, and I believe it was one other former pro tennis player. Surprisingly, it did very well when viewed in the context of their entire programming week the slam out delivered 13 nationally televised MLB games, seven NBA match-ups and five NHL games. So it was watched quite a bit now given these are former professional tennis players are taking on pickleball. So that definitely was part of the appeal of seeing tennis players and former tennis players of our past that we used to love and admire playing this game. I think it's things like that are starting to gain some traction, and then also as a player if I want to improve myself as a player, watching it also is going to help me improve. That's the nature of sport. You play it, you watch it, and then you try to imitate what you actually watched. I think it could have some traction. I'm still skeptical, but hey, look people not to take it dig that people watch curling pretty avidly too so you never know.
Ricky Mulvey: Sanmeet Deo. I always appreciate your time.
Sanmeet Deo: Great. Thanks, Rick.
Dylan Lewis: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening, and we'll be back tomorrow.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dylan Lewis has positions in Spotify Technology. Nick Sciple has positions in Aritzia and Winmark. Ricky Mulvey has positions in Lululemon Athletica, Netflix, Spotify Technology, Winmark, and Xponential Fitness. Sanmeet Deo has positions in Amazon.com, Netflix, and Xponential Fitness. The Motley Fool has positions in and recommends Amazon.com, Apple, Aritzia, Lululemon Athletica, Netflix, Nike, Peloton Interactive, Spotify Technology, Ulta Beauty, and Winmark. The Motley Fool recommends ThredUp and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
