Even in the current low-unemployment, low-inflation U.S. economy, prosperity isn't evenly distributed. But if you're part of the demographic that's comfortable spending $100 on yoga pants, or the smaller population of people ready to shell out $5,000-plus on a new dining room table, well, clearly you've been out shopping lately. Apparel retailer lululemon athletica (NASDAQ: LULU) and furniture purveyor RH (NYSE: RH) -- the former Restoration Hardware -- both delivered upbeat quarterly reports after the bell Wednesday. Business is good.
In this MarketFoolery podcast, host Chris Hill and MFAM Funds' Bill Barker discuss Lululemon's ongoing success, its brand management, and its growth plans, but they also offer up some caveats to investors. For RH, they'll consider the way macroeconomic conditions have shifted from a drag on the company at the end of last year to a tailwind now. But the Fools will conclude this episode on a "what were they thinking?" note. Back in February, regional banks SunTrust (NYSE: STI) and BB&T (NYSE: BBT) announced they were merging in a deal that would create a new top 10 U.S. bank, and Chris at the time hoped that management would make a smart decision when it came to rebranding the combined company. Spoiler alert: They didn't.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on June 13, 2019.
Chris Hill: It's Thursday, June 13. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio, from MFAM Funds, Bill Barker. Happy Thursday!
Bill Barker: Thank you!
Hill: Congratulations to all the St. Louis Blues fans out there on hoisting Lord Stanley's cup. Arguably the greatest trophy in professional sports, certainly in North America. Don't you think?
Barker: Certainly off the top of my head. The trophy itself has more going on with it, in its history and its legend and the stories about it. Whereas the Vince Lombardi Trophy, or whatever the World Series trophy is called, yeah, there's no legend there.
Hill: That's true. Also the fact that everybody gets to take it home for a couple of days. That's pretty great.
Barker: Well, that's where all the legends come from. That's where all the stories come from.
Hill: We're going to get to some retail earnings. We are absolutely going to get to the banking news of the day. Let's start with lululemon athletica. First quarter, I actually saw two different numbers on same-store sales. I saw up 14% and up 16%. We can just split the difference and say they were up double-digits. Lululemon also raised guidance. Shares up not tremendously on the day, maybe 1% or 2%. I think that's because they've had a good run of late.
Barker: Yeah, maintaining at or near an all-time high. And yeah, the numbers that they presented were even a little bit more confusing than that. Its comparable store sales up 6%. 8% on consistent dollar basis. That's making an adjustment for foreign exchange. But then, total comparable sales up 14%. That includes open stores. Total sales up 20%. That includes online. They're doing a lot of things right. The margins are improving, they're getting it right in the stores. That's very much an outlier for retail right now. They're also doing it right online, which is less of an outlier, but great to be doing both right. That's part of the reason why the margins are improving, which is making the bottom line that much stronger.
Hill: One of the things Seth Jayson and I talked about yesterday about Lululemon was the challenges, let's put it politely, that the company has had in the executive suite over the last few years. And yet they've done an effective job throughout, I would argue, the past decade or so, of moving the brand away from initially being associated with hundred-dollar yoga pants to being more of an athletic brand, a lifestyle brand. They've done a very effective job of growing the brand equity of Lululemon. You look at Calvin McDonald, the current CEO, and one of the comments he made was about their plan to, as you touched on, grow digital sales, to double that in the next five years; to do the same with men's sales; to really grow international in a big way. If they continue down this path, I don't see any reason to doubt that they can accomplish this.
Barker: Yes, although I think taking the recent strength of operations and the numbers and then projecting that forward is a danger with retail, particularly with fashion retail. Fashions come in and out. They're, I guess, in an area which is growing, athletic wear. I think they're in a good place. But there'll be a hiccup, or more than a hiccup, there will be a miss somewhere, as there have been in the past. Some of that may be attributable to previous management, which has thankfully departed. But they will not go on forever without having, as I say, either a hiccup or a miss or go off the rails in some fashion at some point.
Hill: Right. I'm not suggesting that it's going to be nothing but sunshine and rainbows for the next five years. I'm curious, though. You used the word "fashion" referring to their retail. Do you think of this as a fashion retailer? I actually think of Lululemon as essentially walking the fine line between fashion retail and full-on athletic retail like a Nike or an Under Armour. I think they've done an effective job of splitting the difference.
Barker: Nobody anywhere should rely upon me for opinions about fashion. That said, as you know, and I've disclosed before, I am the reigning worst-dressed man in North America, and I've retained that for really an impressive period of time. I saw a tweet today to an article, something to the effect of, what the covers and the coverage of women's athletic magazines are. And it was a picture of Billie Jean King from back in the 70s, obviously drawing attention to her competitive abilities and the fact that she was an athlete competing against other athletes. If you were to look at the comparable magazines today, it would be about yoga, and things which are lifestyle, and things which are exercise, but are not competition. I'm certainly not qualified to say whether that's true across the entirety of women's sports and athletic coverage. But, where does Lululemon fall in that? Where do you place it? I don't think of suiting up in Lululemon to go out and compete, which I do think about with Under Armour or Nike.
Hill: I agree with that, although clearly Lululemon makes stuff that is for exercise. Maybe it's social exercise, with yoga or something like that. But no, I think they've done a very effective job of not just growing the company, but really growing the brand. I think the fact that they walk that fine line between fashion and athletic apparel is a credit to them.
Barker: Yoga is not something which is widely recognized as having competitions, although, did you listen to the ESPN 30 For 30 podcast? You ever listen to that?
Hill: Not recently, no.
Barker: They had a season on the hot yoga guy whose name eludes me.
Hill: I've heard of hot yoga, I didn't realize there was a guy who gets credit for starting hot yoga.
Barker: And trying to patent it or something. I'm spacing on his name at the moment. But he had claimed, for years, to have been the Indian yoga champion from many years back, back in the day, when you could make claims and not have them checked, and that check then publicized all around Twitter and Facebook and everywhere else, where information becomes immediate. It wasn't until a certain period of time where there was some international yoga champion, and he was claiming to be it before the inauguration of this event. But you can, I guess, compete in yoga. You. You can. This is what I'm saying. There's still time for you to start competing in yoga. Lululemon can help you out with that.
Hill: My flexibility is so limited, I have trouble tying my shoes. I'm not going to be competing in yoga. But look, it's just a matter of time before this is an exhibition sport in the 2028, 2032 Summer Olympics.
Barker: Let me sell you on something. You're a well-known, internationally, competitive runner.
Hill: Yes, absolutely. [laughs]
Barker: [laughs] Are you going to get better over time from here?
Hill: Probably not. I mean... where are you going with this? I have other stories to get to.
Barker: In yoga, which, you currently are so bad that you can't tie your shoes, you will get better as you take it up and start competing. Whereas running, which you love and are well known for, you may have peaked. I don't know. I'm not accusing you of having peaked. In your last marathon, for instance, you didn't wind up hospitalized.
So, you seem, to me, from the outside, to be getting better. But there will come a point where you will say, "You know what, I'm never going to beat the best time I ever had." Whereas I think that your ability to get better at shoe-tying and other things that might come out of your increased yoga use are in front of you.
Hill: You know what? When that day comes, I'm going to be shopping at Lululemon because I know they can actually provide good apparel. Let's move on to RH, which is better known as Restoration Hardware. First quarter, they needed this quarter. Restoration Hardware put up some strong profits. They raised guidance for the full fiscal year. The stock is up 21%. And as they said, they needed it, because even with this rise today, it's still down year to date, and really over the past 12 months.
Barker: They are correlated -- I may come back and address whether they're better known as Restoration Hardware, and why they got away from that name to go to RH. I think that naming has a thread through today's episode of all these stories. In disclosing their last quarterly report and lowering guidance for the year, RH was affected, seemingly, because of the highly discretionary nature of purchasing anything at Restoration Hardware, which is not competing on price. To be affected by, if not the economy, the stock market going into the fourth quarter, when the stock market last year was very weak. That would have affected their biggest quarter. They were projecting ahead and seeing discretionary spending for their end, of the furniture, under attack. And it's been a better quarter since three months ago. They've had a better quarter in their results. Now they're able to project ahead. We'll see, if the market goes down 15%, whether they're making another adjustment. Not that that's the only element of what affects the upper middle class or upper class, the people who are most likely to be shopping at Restoration Hardware. But the market does affect, at least in the short-term, some discretionary spend.
Hill: But one of the things we've talked about on this show, and has been covered ad nauseam across financial media, is the ripple effect of tariffs. Part of the way RH was able to put up this good quarter is because, as they said, they selectively raised prices on different items because of the effect of tariffs. I looked at that and thought, yeah, you know why? Because they can. Because the people who are going in to buy an expensive sofa, if it's 8% more expensive because of tariffs, they're not going to bat an eye at that, because they're already shelling out a good amount of money. It's not to say that they can do it across the board. Clearly, they haven't, because they realize they can't do it across the board. But I think they have pricing power. At least in this one quarter, they showed that they know how to use it smartly.