The Good News From Chewy, Five Below, MongoDB, and Lululemon – The Motley Fool

In this podcast, Motley Fool senior analysts Ron Gross and Emily Flippen discuss:

• The debt ceiling resolution, and updates on employment and consumer debt.
• Why Chewy and Five Below continue to report strong results while other retailers are seeing consumer spending slow down.
• The numbers behind MongoDB‘s blowout earnings release.
• Lululemon‘s strong earnings report.
• Two stocks on their radar: Compass Minerals and Veeva Systems.

In addition, The Motley Fool’s Scott Kassing talks through three high-conviction stock ideas with Sandhill Investment Management’s Richard Ryskalczyk.

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 02, 2023.

Dylan Lewis: We’ve got plenty of news on the big picture and where consumer spend is and isn’t going. You’re listening to Motley Fool Money.

It’s the Motley Fool Money radio show. I’m Dylan Lewis, joining me in studio, Motley Fool senior analysts Emily Flippen and Ron Gross. Great to have you both here.

Ron Gross: How are you doing, Dylan?

Emily Flippen: Hey.

Dylan Lewis: We’ve got stock ideas and some earning surprises, but we’re kicking off with the big macro, got the debt ceiling deal, a fresh jobs report, and an update on consumer debt. Ron, where do you want to start?

Ron Gross: Let’s go to the debt ceiling because I think it’s on everyone’s mind, and I’ll say phew. Phew. How about that? Yeah, we got it done. I honestly didn’t think it was in jeopardy of not getting done, although there were a few days here and there, where it seemed like our politicians might not be able to come together. But it was literally a necessity. When something is literally a necessity, I think it’s fair to bet on that happening. It was a compromise, as most things in politics are, that’s fine. Some give-and-take. We live to fight another day whether there should be a debt ceiling or not, it’s a political question, not really an investing one so I will leave that for other pundits. But I personally, I’m happy it got done. Friday’s stock market is strong. I would think partly as a result of that being accomplished.

Dylan Lewis: I’m going to speak for the market and investors everywhere and say, I’m just happy that the government will have the ability to pay its bills for the foreseeable future. Emily, apart from that, anything you’d add to the debt ceiling?

Emily Flippen: I love this game of chicken we play with our financial systems. Lots of fun for investors in the market, but in all seriousness, we do get some interesting developments out of these occasionally. I think we saw one today with the debt deal, the deal that raise the debt ceiling actually cut IRS funding that was granted as part of the Inflation Reduction Act by upwards of $20 million. It was an $80 billion deal. That could impact the development of a free federal tax filing system, $20 billion, excuse me. So cutting that by $20 billion, maybe the IRS doesn’t come in, doesn’t develop their own tax system which had been previously a priority of that government agency, which could be a net positive for some of the free tax filers that already exist out there, like Intuit‘s TurboTax. Just seeing where the federal government spending is going to shift potentially over the next couple of years, that’s one of the things that was standing out to me.

Dylan Lewis: Sticking with the big picture, we’ve also got a fresh jobs report Friday morning. U.S. employers added a seasonally adjusted 339,000 jobs last month, and unemployment currently sits at 3.7%, up slightly from recent months. Ron, what stood out to you in the report?

Ron Gross: This one is interesting to me because the jobs report came in hotter or better than expected. But there was a mixed bag because unemployment did tick up to 3.7%. Now that’s due to a sharp decline in self-employed data, people who identify as self-employed. That’s interesting a little bit in and of itself. But interestingly, the markets reacted positively to the strong jobs report. Now that is counterintuitive to the usual counterintuitiveness. It’s the same as double negatives make a positive. Usually, you would expect the market to sell off on a strong report because that gives the Fed cover to continue to raise rates if they feel they need to. Strong labor market leads to higher wages, wage inflation that keeps inflation persisting. But just when you thought you had these things figured out, the market goes ahead and pulls a 180 on you, trades higher, maybe it’s the debt ceiling, or maybe it’s that some of Friday’s data did show a moderating in wage inflation, and that is good news. Maybe not for the person earning the wage, but for the economy as a whole and what the Fed is trying to do to slow the economy. But we had a very strong Friday on this hot jobs data.

Emily Flippen: I will say this, I think part of it could also be the presumption that the federal government is not going to raise rates despite what a strong jobs report this was. I know that sounds counterintuitive because the Federal Reserve has said time and time again, no, we’re going to do what’s best for the economy regardless of how the market reacts, regardless of how other pundits react, we’re going to do what we think is best, but I think part of their job is managing expectations. So many consumers, Americans, investors, and the market, they’ve already baked into their expectations. No near-term rate increases. Part of me wonders if they’re taking that for granted and expecting things to stay the same even if the jobs report is strong.

Dylan Lewis: We generally don’t factor the interest rate movements too much into our individual investment decisions. Is there anything in here, Ron, that you would look at and say, this is what I expect. I know the jobs report can be a bit of a gamble as we look at it. But is there anything that you would say, yeah, this is where I’m leaning with where the Fed might be going.

Ron Gross: Well, I think the economy looks strong enough right now where I don’t expect a recession to be imminent. The big R word keeps rearing its ugly head as the Fed continues to raise. I’m not necessarily sure the Fed is actually done raising completely, maybe there’ll be a pause, maybe we will get 25 basis points here or there, or maybe the economy will slow as a result in 2024, but I don’t see an imminent. I think we’re going to be relatively OK, even if a recession happens, I think it will be shallow. At least that’s the way the numbers seem to be shaping up right now.

Dylan Lewis: One more data point that might have gotten lost a bit in the shuffle this week, consumer credit and revolving debt continues to rise and is nearing $1 trillion, according to the Fed. This has been an interesting metric to follow over the past few years. It is currently clocking in at all-time highs, Emily, up 25% since 2021. Does that have you concerned at all?

Emily Flippen: Well, it doesn’t have me shocked. That’s for sure we’ve seen record-high inflation, we’ve seen a pandemic, we’ve seen just the general lives, of I think, average Americans be really negatively impacted by the cost of living. So, I’m not surprised to hear that a number of those Americans are increasingly putting necessities on their credit card bill, which is what I think this probably is, people, trying to pay for things like groceries or phone bills, stuff that is no longer discretionary but necessary. It’s good to see the economy somewhat being strong, hopefully, that number comes down, but with inflation the way that it is, it’s not a surprise to see credit card debt rise.

Ron Gross: Let’s be careful when we say consumers are strong because if it’s at the expense of their savings or at the expense of a higher credit card bill, that’s really not the definition of strong to me. I think we can talk about this a little bit later, we’re starting to see that show up in some of the retailers that focus on lower-income shoppers. The Fed appears to be maybe getting what it wants, which is a slowing down of the economy and spending, but consumers maybe making up for that by dipping into savings or debt.

Dylan Lewis: Let’s zoom into that retail space a little bit and start examining that because I think as we start to see consumers get stretched, you wonder where dollars start to go. We looked at some results like those from Macy’s this past week. Really a seemingly solid quarter meeting expectations from this business, but it cut the forecast for the top and bottom line for the rest of the year. Reading through the call, Ron, it seems like they are being cautious as they look out and a lot of retailers are as they’re planning the rest of the year.

Ron Gross: They are, and it depends on where you’re focused. Macy’s is seeing weakness in discretionary categories, as I think will be a theme as we go across, whether it’s TVs at Target or some discretionary items at Macy’s. That’s where they’re being cautious, appropriately so. This stock is still off 40% from its 52-week high, so even though perhaps some of this data from this quarter met expectations, it’s still relatively weak with sales down 7%, brick-and-mortar down 6%, digital sales down 8%. There’s some real weaknesses continuing in this business. You did have a slight increase in gross margins, but that was offset by higher operating expenses. It all boils down to earnings per share being down almost 50%. This is a weak business currently in this environment causing them to lower guidance. Again, demand trends weakening further in discretionary categories is what the CEO said. They’re going to have to continue to take markdowns, they’re going to have to continue to adjust product mix, deal with high inventory levels, and hopefully have it worked through the system. They maintained their dividend, 4.8%, it’s actually trading 4 times updated earnings. If you want to take a shot on a retailer that’s been around for quite some time, getting their act together, that could be interesting, but things currently are weak.

Dylan Lewis: You mentioned management’s comments. They said something to the effect of consumers are pulling back in retail spend, and reallocating to food, essentials, and services. As we look to earnings from other companies, looking at Chewy here, pet supplier, it seems like Emily, people are still very comfortable spending on their pets.

Emily Flippen: I have a bone to pick with you, Dylan. Always seem to want to give credit to Chewy’s success on factors outside of their control. Like you just said, oh, well pet spend is up, so Chewy is doing well. But this quarter, the past couple of weeks have been a great example for why that is exactly not the case because you can look at Petco. Petco reported earnings, I believe last week and the market was extremely disappointed because of management’s commentary around the fact that consumers aren’t making this discretionary spend, their margins are weak. The economic environment is getting worse and meanwhile Chewy comes out and it’s almost the exact opposite story. Maybe the discretionary spending has fallen, but they’re saying, look, people aren’t trading down on their pets. They’re still buying the premium items that have slightly higher margins. The premium foods, the premium toys, because that’s how much they care about their animals, and that’s a deep relationship that Chewy has with their customers is that they understand the value of Chewy’s platform in a way that I think Petco doesn’t quite understand. Chewy knows. Look, I have a cat. I also recently bought a house. Do you know how many ads I’m getting from Chewy about cat towers? I have like three cat towers coming to me in the mail. Petco doesn’t know that about me, despite the fact that I can shop at a Petco and I have bought food at Petco before. Chewy just has a better understanding of its customer than other pet retailers. That’s what we saw showing up in this quarter. Just incredible results, some expansion of margins despite the fact that the economic environment is weaker.

Dylan Lewis: One of the things I wanted to dig into was that relationship with customers. I think one of the ways that it shows up in the results we saw from Chewy was those Autoship sales, those were up 19% year over year, outpacing overall revenue growth for the business. I have to think if you’re a retailer, having that type of relationship with your customer has to be the dream.

Emily Flippen: Yeah. The relationship is great, I will say as an investor, it makes me a little bit nervous because as you mentioned, nearly three-fourths of all sales are coming from their Autoship program, which is great. That’s a deep relationship, a deep understanding of what those consumers need. But they don’t exactly have a lot of room for improvement from those levels. There is still going to be a portion of their sales that are happening spontaneously. I realized that I need something, I need it to be delivered to me quickly. Chewy has the best offer, I’m going to buy it quickly. Maybe that’s off-cycle from when I would normally get an Autoship. If that’s a key metric that investors are looking at, I wouldn’t be surprised to see that tick down at some point, even marginally in future quarters, just because it’s already so high. The same is true for their net sales per active customer. For the first time in Chewy’s history, it surpassed $500 per customer, which is incredibly high. We’ve seen that grow as the relationship deepens over time, but we’ve also seen incredible levels of pet inflation in particular. That’s also potentially artificially inflated by the price of the goods that people are buying. I wouldn’t be surprised if the economic inflation comes down to see both of these metrics come down as well.

Dylan Lewis: After the break, we’ve got more retail news and updates from tech companies. Stay right here. This is Motley Fool Money. Welcome back to Motley Fool Money. I’m Dylan Lewis here in studio with Emily Flippen and Ron Gross. We were talking retail earlier and the theme of slowing consumer spend is very present right now, but it seems to be hitting retailers differently. Ron, we look at results from discount retailers, Dollar General, and Five Below, we see slightly different narratives with these two companies in their earnings reports.

Ron Gross: Yes, and it’s a little bit surprising because you would assume they have a similar client base, but it’s not exactly the same. Dollar General is indicating that due to the macroeconomic environment, business has been quite challenging. Their customer base, which is lower-income shoppers are shifting their spending to basic goods and cutting back on discretionary purchases. Not different than we saw in Macy’s or Target or any of the other retailers that have been reporting. That shows up in their numbers. But more importantly, it shows up in their guidance and the stock got slammed as a result of that guidance because it is relatively weak. Now with Five Below, even though a similar customer base, it’s a little bit different. They have a slightly higher price point. They have some stores that are even higher than the typical stores’ price points. They’re very good at creating the merchandise mix that the customer is looking for. As a result, the metrics that they put forth in this earnings report are really strong and they were able to tighten their guidance, not raise it, but tighten it because they have a better outlook into the future which is also interesting because this is a very uncertain environment. Their numbers continue to look strong, including opening 200 plus stores and continue to expand. They’re two very different reports and you may not have guessed they would be at the outset.

Dylan Lewis: You mentioned the store opening plans, and that was another place where these two businesses diverge a little bit. We saw in commentary from management Dollar General say they are going to be a little bit more opportunistic with real estate and may slow some of their expansion plans, believing that perhaps there may be some real estate deals for them in the future. Ron, I wanted to ask you, is that something that you buy as a commentary for management or do you think that is a nice way to say we are altering our plans for the rest of the year?

Ron Gross: Well, for sure there are altering their plan for the rest of the year. Dollar General is going to slow the spend, which by the way, is what you want your company to do if things are not going that well, despite your desire for a company to grow, if the environment is not right, then you do want them to slow. On the other hand, Five Below is going through their Five Beyond concept, which is a little higher price point. That’s where they’re focusing on a little bit of the more high-end consumer where they think the opportunity lies. It will be interesting to see the next report and the report after that, how things are going.

Dylan Lewis: Switching over to tech, MongoDB posted some eye-popping results in their first-quarter report this week, revenue for the database software company was up nearly 30% year over year to $370 million and net losses came in ahead of expectations. Emily, I was looking at this report and to me, it seemed like one of those earnings results where pick a metric and the company did a pretty great job?

Emily Flippen: It was eye-popping to everyone including management themselves. [laughs] If you listen to the call, management almost sounds confused about why they did. They said, we had all these expectations for what the first quarter could look like, but man, did it really do better? If you haven’t read through yet, virtually every metric across the board for was performing well. That’s great for a business like MongoDB because they’re competing with other database solutions from cloud titans like Amazon, Google, Microsoft, Oracle. They need to have those customer wins. We saw that customer wins, especially in the large enterprise side, come through with this most recent quarter. But what I found really interesting was the fact that they attributed some of their unexpected success to actually AI and machine learning users, so shocking, exactly. Well, actually it’s interesting, though, because their NoSQL database, which is better for unstructured data, plays really well into the hands of the unstructured data that you typically get from things like AI programs. But 10% or so of the customers that they acquired in the most recent quarter were specifically using their solutions for AI or machine learning, which is a large portion. Probably responsible for that unexpected win, so depending on your opinions about AI or machine learning, that could probably factor into how you expect MongoDB is going to do in terms of eye-popping results and future quarters on the plus side or the downside.

Dylan Lewis: One of the things that I wanted to dig into, the comments from management in this report was the CEO said they’re seeing customers continue to scrutinize technology spend and they are looking to separate the must-haves from the nice-to-haves. From everything I’m seeing the results here it seems like MongoDB is firmly on the must-have side for a lot of businesses.

Emily Flippen: That’s what management want you to think. They spent virtually the entire call explaining all the different use cases they have, especially with some Chinese companies as well like Alibaba and how they’ve implemented their solutions to decrease their cost structure, improve efficiency, and it’s great. They do seem to have a lot of wins. Now whether or not something was actually necessary the amount of consumption that happens on the platform. We’ve seen that decline as consumption has declined just across the board because of the broader economy. It might be a must-have, but consumption is still a big question mark.

Dylan Lewis: Ron, one of the things I wanted to ask you about was, we know customers are going through this mindset and this approach to looking at where they’re spending their money. Is it fair for investors to take a similar approach? They look at some of the names, especially the tech names in their portfolio.

Ron Gross: Omega has declared this the year of efficiency and then we’re seeing that across the board, whether it’s becoming meaner or doing layoffs. You do want your companies reacting to the current environment, even if that means selling off an underperforming subsidiary and as investors to hone hopefully a diversified portfolio, you want to make sure you own the stocks that you’re most comfortable with that are taking the steps necessary to outperform.

Dylan Lewis: Emily Flippen, Ron Gross. We’ll see you a little bit later in the show. But up next we’ve got some high-conviction ideas to keep an eye on.

Welcome back to Motley Fool Money. I’m Dylan Lewis. We love getting stock ideas here at The Motley Fool and getting other perspectives on the companies we follow. The Fool’s Scott Kassing sat down with Richard Ryskalczyk, the chief equity analyst at Sandhill Investment Management, to get a bit of both. The two talked about some of Sandhill’s highest-conviction ideas right now in cybersecurity and healthcare and how their team is analyzing high-growth companies in the current environment.

Scott Kassing: If you don’t mind, there’s one name on your high-conviction list that I wanted to start with, and that is Palo Alto Networks, ticker symbol PANW. The reason being is the industry it lives in, cybersecurity, and the consensus around that. I haven’t met an equity analyst who’s bearish on the space. Everyone believes five years from now, it’s more relevant. Where I do see non-consensus is who the winner or winners will be. In a space like this, I’m so tempted to just buy an ETF or a basket of cybersecurity stocks. From your lens, why is that not the best approach? Why Palo Alto?

Richard Ryskalczyk: From the highest level, I agree completely. I fully understand that there is consensus long this entire area and for good reason. There’s just so many continued cyber threats, whether that be from foreign entities or smaller hackers to large governments, that’s not going to stop. Then when you layer on top of that, just the continued larger attack surface that’s out there. You not only now have your internal network. You have cloud-hosted data, you have all of your employees working remotely on multiple devices. You have a massive long-term secular growth opportunity in this industry. It’s a $100 billion-plus market growing 14%, so I understand why everybody likes this area. To your point, there’s a lot of fragmentation there. There’s a lot of competition in the space. You’ve got the Ciscos of the world, the Junipers, the Symantecs, the Check Points. All of these, I guess I’d call them the old guard, if you will, much slower growing. You’ve got some of these newer-guard platforms like a Palo Alto or a Fortinet. Obviously, Microsoft is huge in the space too. Then I think your point is there’s a lot of other smaller point solutions like a Zscalar or a CrowdStrike or SentinelOne, so why not just own a basket of all of them? It goes down to, what is the valuation on each of these? What’s the valuation relative to the growth rate?

What is their free cash flow look like? We generally stay away from some of the ultra high-growth that are not yet profitable just because it’s so difficult to figure out exactly when will they hit profitability. Specifically on some of those point solutions, it’s hard to see how in the long run they’re able to hold onto their niche or their competitive advantage because there’s always the next threat and the next piece of software to come out. What we’re really seeing and one of the reasons we like Palo Alto specifically is on top of this just general cybertrend, and we’re seeing this throughout all of software, is you’ve got all these multiple points solutions that these CTOs have at these large enterprises. Basically, their heads are spinning trying to manage all of these solutions, trying to stitch them altogether where there are holes in that. What we see is this continued consolidation down and the number of vendors that these larger enterprises are utilizing, and they’re shifting more toward these broader platform solutions. Not only do you have the broad trend, but you’ve got a player like Palo Alto who’s built a really phenomenal platform solution to take care of really all of the main issues within the cybersecurity space today. That’s why we’re pointing specifically at Palo Alto.

Scott Kassing: Maybe an unofficial prediction, there could be some M&A activity in the space in the future and Palo Alto’s, I guess, one-stop-shop reputation gives it an advantage over maybe an Okta which is very specialized, meant to be a complement. Is that fair?

Richard Ryskalczyk: No, I think that’s a great characterization. This has been a trend we’ve followed for many years, as I’m sure many have. Palo Alto went through a period of time where they actually were the consolidators in the industry and they bought up a handful of businesses and then worked to recode and retool everything onto this one platform. They were a consolidator, but yes to your point, like an Okta for instance, that point solution, that can be replicated and when you can replicate that and you toss that onto a broader platform, I think some of those moats that maybe Okta might’ve had when they first came out, start to erode a little bit.

Scott Kassing: One company, in particular, I’m really excited to talk about that I think is probably the least familiar to our listeners, and that is TransMedics. I came across this company when I saw a stat that said, I believe only around 20%-25% of hearts and lungs that are donated are actually transplanted. That level of inefficiency just boggles my mind. Could you give the listeners just a brief breakdown into what exactly the TransMedics business is and your thesis behind it.

Richard Ryskalczyk: Sure. Yeah. TransMedics, it’s definitely our earliest-stage investment as far as the life cycle of the business is concerned. They’re still very early on in trying to accomplish what they are looking to accomplish. So the company is, as you pointed out, they’re looking to revolutionize organ transplantation. As you mentioned, I think when you look between heart, lung, and liver, maybe only about a third of those overall organs that are donated are actually transplanted. For heart and lung, yes, it is about 20% or so. You check that organ donor on your card, but very low likelihood that those organs actually get donated. A big piece of that is just the limitations of the current system being that you have limited time to transport, you have limited distance because of that, that you can transport these organs. The standard of care right now is that these organs are basically shipped in an Igloo cooler, sitting there on ice essentially. You see all these other advancements in the healthcare industry and you say, how is this possible when you have heart surgeons who have spent a decade in school learning how to do these transplants, essentially going and putting the hard on ice and taking it into a plane and getting it from patient A to patient B. It’s pretty astounding that that’s the level of this industry. What TransMedics is looking to do is really take, they’re now FDA approved, what they call their organ care system, this OCS medical device, which keeps the lungs breathing, the heart beating, the liver going, and allows the transplant team to monitor the vitals of these organs and it allows them to keep these organs basically alive. One, you see what the vitals are, which is a huge piece of it. But two, you can keep them alive for much longer, so you can take them on longer flights for longer distances. It’s really looking to completely revolutionize this whole marketplace.

Scott Kassing: For sure. Well, it’s got such a good for humanity mission that it’s tough to root against. Now I will say the market certainly has been paying attention. I think if I look at it today, the stock is up 37% year to date, so the question I have in my mind is, I love the business, but do I love the stock? How do you go about valuing a company that is fast-growing but it’s not yet profitable and we could be entering a recession in late 2023? How are you balancing the risk and the opportunity there?

Richard Ryskalczyk: Sure. Well, when you step back and you look at it from the 40,000-foot view and you say, what’s the opportunity here? When they say there are about 17,000 organs between the heart, lung, and liver that are transplanted per year, and TransMedics has a goal of essentially doubling that over time. If they can go and do that, right now, they’ve got about a 10% share of the current market. They want to become the standard of care. Not only do they want to take a large share of the current transplants that are being done, but they then want to go and double the overall marketplace. If they can even work their way anywhere near toward that, they’re almost at a level of profitability now. In the most recent quarter, I think their revenue was up over 160% and they only burned through, I think, I believe about $6 million dollars in cash. They’re well on their way to getting toward profitability here. They’re not going to keep growing 162% by any means, but if they can keep the growth rate up and hit some of the levels that they want to hit as far as penetrating this marketplace and growing the overall market, there’s a ton of upside is still be had from here. Yes, it’s had a nice run throughout 2022, and thus far into 2023. But if they’re able to, looking a few years out, get to the penetration rates that they think they can from here and get to some profitability I think you could still see the stock substantially higher from here in the not-too-distant future. Now you’re starting to talk about not just a price-to-sales metric, you’re starting to talk about actual free cash flow at a P/E multiple. We still think there’s a lot of upside here.

Scott Kassing: Well, you touched on it at the end. I would say there’s a renewed respect for valuation among our listener base post the growth-stock collapse of 2022. When you look at TransMedics, price-to-earnings isn’t going to tell you anything. It’s in the negatives. It’s price-to-sales. A multiple metric that you would encourage an investor who has this on their watch list to focus on or is there a better multiple metrics to keep their attention toward?

Richard Ryskalczyk: Yeah, I mean when we talk about it here internally, we look at it a handful of different ways, so even though they’re not currently profitable, we still have gone and built out our model on where we think they can get to as far as penetration rates and growing the overall marketplace, and then you take a look at where they think over the medium term the gross margin can be and work down from there to get toward a profitability level, so you can look at potentially putting earnings multiple on a handful of years out from now and then discounting that back. You can look at maybe it’s at 12 times sales right now, but in a few years from now, if they can get to $500 million in revenue in 2027, that sales multiple will contract, maybe that contracts down to 10 times and that’s $150 stock and at 20% CAGR from here and based on some of the assumptions we’ve made, so a certain level of profitability in that maybe that’s 50 times earnings multiple for something that’s still only maybe at that point 30% penetrated and still has room to substantially grow the overall marketplace as well from there which I think is more than reasonable. There are a lot of different ways to look at it from multiples on current year’s sales to, let’s do a DCF based on expected profitability too. Let’s look a few years out in the more medium-term and put a multiple on it and discount that back, so we’ve looked at it a handful of different ways.

Dylan Lewis: Coming up after the break, Emily Flippen and Ron Gross return with a couple of stocks on their radar. Stay right here. You’re listening to Motley Fool Money. As always, people on the program may have an interest 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. I’m Dylan Lewis joined again by Emily Flippen and Ron Gross. We have one more earnings story before we get over to stocks on our radar. Ron, a strong update from Lululemon this week that the leisure company posted 24% revenue growth and raised its outlook for 2023. This seems like good news for a company that probably needed some good news.

Ron Gross: They’ve had some stumbles of late, but overall a very strong company and you’re seeing the real divergence here between the high-end consumer and the lower-income shopper that we discussed earlier where we’re seeing some weakness in companies like Dollar General. Lulu, a very strong report as you mentioned, strength internationally up 60% and 79% increase in sales in China as China continues to open up. Comp sales up 13%, and direct-to-consumer up 16%. That’s 42% of sales now which is interesting because it’s down from 45%, so more in-store sales of late, just something to keep an eye on. Gross margins are up, operating income was up, earnings per share up 54% really strong. On the back of a little bit of a flub in their Mirror business that they acquired relatively recently for $500 million, wrote that down, looking to sell that, moving that business to an app-based solution which I think makes good sense, so they needed to work through that, put up some good numbers to have investors focused on some other metrics and not the Mirror business.

Emily Flippen: Uh, relatively recently, Ron? That was three years ago. That was peak pandemic hype, not surprised at all. I don’t think anybody wants to see them when they get out of that home fitness business. Peloton is just continuing to be a dumpster fire, so it’s a great example of why it’s probably not advantageous for Lululemon to hold onto that, especially when their core business is performing so well. But my big question mark is, how far does the pricing power for this company go? I mean I love my Lululemon leggings. They are expensive but I still have a hard time justifying the purchase, but I do justify it to myself. I mean do they have Apple-level pricing power or is it more like Chipotle where at some point the Chipotle burrito’s not worth it now, can they hike the prices? Yes. Will I pay up for Chipotle? Yes, but it doesn’t go as high as say my iPhone, so that’s my question mark with Lululemon long-term.

Dylan Lewis: Let’s get onto our radar stocks. Our man behind the glass, Dan Boyd, is going to hit you with a question. Ron, you’re up first, what are you watching this week?

Ron Gross: Go Danny Boy, you’re going to love Compass Minerals, CMP. Roots go all the way back to 1844, leading producer of salt for highway deicing. That’s about 80% of sales. The rest comes from plant nutrition sulfate of potash, SOP if you will. Now it’s not all peaches and cream, and weather conditions have hurt the business. They have a rough time passing on inflationary price increases because contracts are done well in advance, but new leadership is making some really strong moves to improve operations, shore up the balance sheet, improve profitability and they’ve got some new lines of business around lithium and some other new items that build on their core competencies that should spur growth into the future. It’s somewhat of a turnaround play, but it’s worth keeping an eye on.

Dylan Lewis: Dan, a question about Compass Minerals.

Dan Boyd: Yeah. Ron, how many cars do you think that Compass Minerals is responsible for completely rusting out in the Midwest, Upper Midwest, and Northeast?

Ron Gross: I’d rather have rust than be unsafe, Dan.

Dylan Lewis: It’s a good point. Yeah, I think listeners are used to hearing AI, perhaps not as used to hearing potash. Am I saying that right, Ron?

Ron Gross: Potash.

Dylan Lewis: Potash. On the show, it’s nice to work that in, I’m sure there are some folks out there that are happy to hear it. Emily, what is on your radar this week?

Emily Flippen: I’m looking at Veeva Systems. They’re a software business aimed at the life sciences industry and they had an unusual quarter this week, mostly because the stock is up something like 15%, which is very unusual for a company that is incredibly stable as Veeva has proven to be, but seasonally strong quarter for them which is wonderful, unexpectedly wonderful. This is a business that has been expanding its margins or looking to expand its margins, growing sales rapidly, but there’s a big question mark right now about how much money they’re spending on building out the functionality of their core CRM products and with their migration away from Salesforce to their own servers hoping that by 2025 they can really start expanding margins, but there’s a good argument to be made that the valuation looks really frothy right now.

Dylan Lewis: Dan, a question about Veeva Systems.

Dan Boyd: In February they became a public benefit corporation and since then their stock is down $90. Emily, is this altruism damaging their business?

Dylan Lewis: Look at that.

Emily Flippen: Shareholders are not happy about the full stakeholder relationship. Now, this is the broader slowdown in software that’s causing the reaction we’re seeing from Veeva plus their valuation. I’d actually argue that their move to become a public benefit corporation think about all their stakeholders is probably going to be a net benefit for this company over the long term.

Dylan Lewis: Dan, you’re really getting two different ends of the spectrum here.

Dan Boyd: You think?

Dylan Lewis: Ron, is giving you earth materials to work with and Emily’s having you focus a bit on the future with software, which company are you putting on your watch list?

Dan Boyd: I want to go with Minerals because I just think it’s more fun, like salt mines and potash, who doesn’t love that stuff? But I think I’m going to go with the public benefit corporation and Veeva this time around, Dylan.

Emily Flippen: A wise choice.

Dylan Lewis: Appreciate it. Emily Flippen and Ron Gross, thanks so much for being here.

Ron Gross: Thanks, Dylan.

Dylan Lewis: That’s going to do it for this week’s Motley Fool Money radio show. The show is mixed by Dan Boyd. I’m Dylan Lewis. Thanks for listening. We’ll see you next time.