2 Things People Are Doing Less Often: Paying by Check, and Wearing Suits
It was an ugly week for shareholders in Tailored Brands (NYSE: TLRD) , the parent company of Men’s Wearhouse and Jos. A. Bank: Though the company met or beat expectations for the third quarter, its share price took a 30% cut Thursday because of disappointing guidance. On the other side of the coin, there’s Visa (NYSE: V) , which announced this week that it’s partnering with fintech player Ingo Money to launch a new offering for retailers and banks, called QuickConnect, that will let them make rapid digital payments to customers, circumventing the old ACH/paper checks system.
In this MarketFoolery podcast, host Chris Hill and senior analyst Jason Moser consider how an apparel retailer devoted to supplying men with business and formal attire can find a future in a world gone casual, they map out the size of the opportunity Visa has in speeding up trillions of dollars worth of transactions, and they answer a listener’s question about insurer Markel (NYSE: MKL) , which is drawing some scrutiny from regulators.
A full transcript follows the video.
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This video was recorded on Dec. 13, 2018.
Chris Hill: It’s Thursday, Dec. 13. Welcome to MarketFoolery ! I’m Chris Hill. Joining me in studio, Jason Moser. Thanks for being here!
Jason Moser: Always happy to be here!
Hill: Considering it’s mid-December and things are typically winding down, we have kind of a packed show.
Moser: It’s an exciting day. There’s a lot going on.
Hill: There is. We’re going to dip into the Fool mailbag. We’ve got not one but two holiday shopping suggestions for the dozens of listeners.
Moser: Hey, now!
Hill: And we’re going to get to the War on Cash, don’t worry. We’re also going to get to the stock that Jason recently bought.
Moser: Stocks. Yes, plural.
Hill: We’re going to get to all of that.
Moser: It’s a big episode!
Hill: But we’re going to start with some earnings from Tailored Brands. The rough week for apparel just gets rougher. Tailored Brands is the parent company of Men’s Wearhouse and Jos. A. Bank. That stock is down 27% this morning on third quarter results that, on the surface, don’t look 27%-negative bad. They don’t look great. You tell me, what’s going on here?
Moser: Well, Chris, you’re going to hate their guidance. I guarantee it. Really, in all honesty, that’s what it is. I think, to your point, the results for the quarter were not really bad at all. They met or exceeded the expectations. It’s really about the forward guidance. They guided down from previous goals. We know how the market tends to receive news like that. This is an interesting company. For the two to exist together like this, it probably makes the most sense.
Hill: Jos. A. Bank and Men’s Wearhouse.
Moser: Yeah. They do very similar things, so you might as well just exist as one strong business. And it’s as strong as it could probably be in the environment. I think the biggest challenge they face is this secular move away from business attire. More and more places are adopting these casual work environments where the expectation doesn’t exist like it used to, where you had to dress up and wear a tie or a suit to come to work. I use us as an example. You and I both know from companies that we see and talk about all the time, more and more companies are adopting that casual environment. I think that’s part of the challenge there.
Now, it’s not to say they can’t deal with that. They can come up with new types of offerings, and maybe steer away a little bit from that formal business attire. But retail is very difficult. They have a bit more than $1.1 billion in debt on the balance sheet. When you have that, along with a company where the top line has essentially hit a brick wall, and margins are now beginning to compress, their biggest challenge, as noted in the call, is getting more people in the stores to buy stuff. The only way you can really do that is to offer more deals, entice them to come in and buy more stuff. That’s fine, but what that ultimately does is plays out on margins, and then you condition your consumers to essentially wait until stuff goes on sale. It’s kind of like that Bed Bath & Beyond scenario there. Granted, I think I’d probably find myself in a clothing store before I’d find myself in a Bed Bath & Beyond store. But there’s a parallel there.
Hill: I’m glad you mentioned the secular decline in business attire. That was one of my thoughts when I was looking over this news this morning, extrapolating my own life and the attire here at the company. There was a point in time where I had a bunch of suits. I don’t anymore.
Moser: I was the same way.
Hill: I don’t need them. In some ways, maybe it is helpful for Tailored Brands that the pathway ahead of them for success, while not necessarily easy, I think it’s clear, and I think you hit on it, they need to start moving away from suits, and they need to start offering more casual clothes. There’s a lot of brand work that has to go into that. I know, for a lot of people, that’s a squishy thing. More specifically, I think that if they were to undertake maybe a two-year campaign, to say, “Look, not only are we going to expand what we’re offering in terms of clothing,” because one thing going relatively well, I think, for Tailored Brands, certainly in the case of Jos. A. Bank, nobody looks at their offerings and says, “That’s bad-quality stuff.” They sell quality clothing. If they were able to expand that down the scale, away from the suits, more toward Banana Republic, and start eating into Banana Republic’s turf, and that sort of thing. And, along with that, doing the marketing spend that they would need to do to really move that brand perception. “We’re not just suits. And, by the way, we’re not just suits on sale,” as you said. It’s, “We offer all range of clothing for men.”
Moser: Yeah. Become more things for more people. We say that a lot. In this case, it may very well be the easiest way to continue to grow. I think about brands that exist out there today that could perhaps complement what these guys are doing. One that comes to mind, have you ever heard of UNTUCKit?
Moser: It’s essentially a shirt built on this notion that we guys are tired of tucking our shirts. So, you’ve got these button-down shirts that are tailored so that they hang just the right amount below the belt line, and it looks classy untucked. Maybe they need to think about bringing a brand like that under their umbrella. Maybe there’s an acquisition to be made there at some point, to be able to offer more breadth to the catalog there. But, again, the problem still exists. They have a big slug of debt on the balance sheet. You have to account for that.
If they decide to issue shares, will that dilute shareholders? They’re in a little bit of a predicament because of the financial position that they’re in. It’s not dismal yet, but it could get there pretty quickly if they’re not careful.
Hill: We’re a couple of weeks away from our annual tradition on Motley Fool Money of our first show of the calendar year; we do a preview. I’m just going to go ahead and say, my business prediction for 2019 is private equity comes in to Tailored Brands. This is a viable business that is stumbling right now. And it’s a $700 million market cap company. Somewhere in private equity land, people are looking at this business, they’re listening to what you’re saying about UNTUCKit and those types of moves into casual space, and they’re rubbing their hands together with glee and saying, “We can fix this, but we need to start buying some shares.”
Moser: I think that’s a reasonable observation. If anyone’s looking at this company, right now is a pretty darn good time to do it.
Hill: Visa announced a partnership to help companies eliminate $33 trillion in paper checks. It is one more move in the war on cash. I remind our dozens of listeners, it was an executive at Visa who used that phrase.
Moser: We piggybacked on it.
Hill: We piggybacked on it, but that was not hyperbole on our part. We were quoting directly from a Visa executive who said, “We are at war with cash.” You like this move?
Moser: I do. This really shines a light, I think, on how valuable that Visa Toll Booth, and Mastercard (NYSE: MA) as well. They both do the same thing. But when you want to do something in finance that can affect the largest population and make an experience better, faster, you’re going to be relying on Visa and Mastercard. You’re going to have to make sure you bring them into that equation at some point or another.
It’s interesting to understand a little bit why this matters. A lot of times, the automatic clearing house process is a way for companies to be able to push these payments to individuals. That has existed for a very long time. I think the fintech industry is looking at the ACH process as a little bit antiquated. And primarily, that’s because of the time involved in moving funds. It can sometimes take a matter of a couple of days. While an institution may make those funds available to you immediately, they could still be on the hook if there’s a chargeback. So, ultimately, what this does is, instead of utilizing the automatic clearing house network, this essentially jumps on those Visa and Mastercard rails. In this case, it’s going to be Visa. I suspect we’ll see Mastercard participating in this in some way, shape or form sooner or later.
When you look at the actual numbers involved of how big of a deal this could be, there’s an association called the National Automated Clearing House association, NACHA. Kind of makes me think of nachos. I don’t know why that is.
Anyway, NACHA reports that the average ACH transaction costs around $0.11 per transaction. There are over 25 billion ACH payments made every year. There were more than 25 billion made in 2016, and that number is up from there. So, you can see the opportunity that exists there. I think this is one way for companies like Visa and Mastercard to get in there and really focus on the one big differentiator here, and that is the time involved in getting the money from point A to point B. That’s the big problem this solves for a lot of people. You get there faster, you reduce the risk of chargebacks, because you’re riding right on those car rails.
It’s the first step, I think, in what we’ll see as the continued evolution in fintech and the companies that are participating.
Hill: What about a company like Paychex , which is in the business of paychecks, and HR solutions? If you’re seeing this news, that’s going to cause an upset stomach.
Moser: I would think. I think employers who utilize Paychex or other forms of payment software are going to look at this and see if there’s another way that they might be able to pay their employees in a timelier fashion and even cheaper than they’re doing so now. We’ve gotten to the point where most people — I think most people. There are still some people out there that physically want to see that check. I know personally, I don’t want to see it. I want you to just get that money straight to my account. I want another check like I want another hole in the head. So, I think that for companies looking at what options exist out there, and you’re seeing companies like Square and PayPal really participating in this, as well, yeah, if you’re Paychex or a company like that, you’ve got to be looking at this and thinking, “Oh, man, what are we going to do to keep up here?” Because this is certainly something that could disrupt their business.
Hill: What’d you buy last week?
Moser: Well… let’s go ahead and just get it out there. I added to positions that I currently have already in Markel and Square. There was some nice dip action on Friday, where I felt like, “You know what? These are two businesses I really like, and they’re looking like pretty good prices.” So I added some. In Markel’s case, we saw that stock dip 10%, which you literally never see. I think the last time I saw that stock move even close to that was when they made some big acquisition, probably five years ago or so. And the market, I think, looked at it initially with a little bit of skepticism. And rightly so. Anytime you make big acquisitions like that, it makes sense to step back and reexamine the situation. But this case with Markel, I have to believe this was algorithm-driven or something. That 10% sell-off in those shares didn’t make sense.
Hill: I appreciate you making that distinction. when we talk about buying opportunities for stocks, it’s important to remember that buying opportunities come in different forms. It’s natural to think in terms of a percentage, just a flat percentage. But, as you point out, a stock like Markel, drops like this rarely happen, as opposed to, say, Netflix . And I’m not talking only about drops in the case of Netflix. There’s some stat out there about, when Netflix reports earnings, the swing the next day is almost always 8%.
Moser: Very volatile.
Hill: Don’t assume that the stocks that are on your watchlist all have the same level of volatility and price swings. Speaking of Markel, question from Jason McClara, who writes, “What are your thoughts on the recent announcement of a regulatory inquiry into Markel?” That may have driven some of those sales.
Hill: Jason writes, “The stock has traded down a little less than 10% since the announcement. Just wondering where things go from here. Thanks.” Thank you for the question, Jason! Yeah, it was a week ago, Markel announced that it is hiring an outside counsel for an internal review after it was notified by unnamed regulators. I think right off the bat, it’s the unnamed part of that sentence that makes some investors go, “Wait a minute, is this a paperwork thing? Is this just a rounding error? Or is the SEC kicking in your door?”
Moser: It’s fair to be a little bit knee-jerk whenever you see “investigation.” That doesn’t exactly instill a lot of confidence. But it’s one where you have to dig in a little bit and try to understand exactly what’s going on here. We look at the 8-K that Markel actually released. They were saying that after having been contacted on November 30th, they’re cooperating with inquiries by U.S. and Bermuda authorities into loss reserves that were recorded in late 2017 and early 2018 in the Markel CATCo Investment Management business.
Hill: God, that’s in the weeds!
Moser: Just rolls right off the tongue, doesn’t it? But my point in reading that, and the CATCo part there, is that it’s limited just to that catastrophe part of the business, the reinsurance CATCo business that they have, and they acquired not all that long ago. It does not have anything to do with any other part of Markel whatsoever. Not Markel Ventures, not the Markel Insurance. This is limited to just one little wing of the business that they acquired for about $210 million a little while back.
Hill: In terms of Markel’s overall revenue streams, roughly what percentage is CATCo contributing?
Moser: I’m very glad that you asked that. It’s not a lot. To be very clear as to what this CATCo business is, they’re involved in what’s called retrocession. Again, rolls right off the tongue, doesn’t it?
Hill: [groans] God!
Moser: Isn’t insurance exciting?
Hill: Is anything duller than insurance?
Moser: [laughs] Retrocession is essentially like reinsurance for the reinsurers. It’s a way that reinsurers spread that risk to other reinsurers. It’s just part and parcel of the insurance business. So, when we talk about the actual exposure to Markel’s overall business, it’s not a whole heck of a lot. If you look at the total revenues that were attributed to this Markel CATCo side of the business in 2017, for the full year, it was only $28.7 million. Markel’s trailing 12-month revenue is about $7.5 billion. This is just a drop in the bucket.
I think it was a little bit of a knee-jerk reaction. The stock wasn’t necessarily cheap before the sell-off. I wouldn’t argue that it’s cheap now, either. It’s still trading at about 1.5 times book value. But my litmus test there is ultimately, what if you just completely eliminated this CAT business from Markel’s business model? What ultimately happens? They lose a little bit on the assets under management side, but it doesn’t really impair the business at all.
Another encouraging thing is that the original management team with this CATCo business is still on. These are the guys that knew the business from the very start. It’s very difficult to come up with the reserves for these reinsurance businesses. It’s not just this set-in-stone process. It’s a bit nebulous, you have to make some assumptions, and we’ve had some pretty severe natural disasters over the past couple of years. These California wildfires are going to be contributing to that as well.
So, it’s understandable in the near term to be a little bit worried, perhaps, of what this might mean. But once you dig in, you recognize very quickly — I don’t want to say it’s meaningless, but it’s pretty close to meaningless when you’re talking about a company that I intend to own for the next 20 years plus, hopefully. These guys know what they’re doing. I think this is one where you can see, it’s a little bit of noise in the short term. That’s why I bought shares on that dip. I’m still confident in what they’re doing.
Hill: To this point, has Markel given any guidance or made any public statements regarding the timing of this investigation and how long it’s expected to last?
Moser: No. There’s nothing that we know, other than, they’re going to continue to cooperate and do whatever they need to do. It’s probably going to result in having to bring those reserves back up to speed. Perhaps that plays out on the book value of the stock in the near term. But, again, they make their money a number of different ways. The Markel ventures side of the business alone, which is wholly owned and partially owned, these businesses that they invest in all over the country, that brought in $1.4 billion in revenue last year.
Again, the point is, this CATCo business, it’s a neat little aspect of the business, but it is not extremely meaningful. Once you can see that, I think it makes a little bit more sense to own the stock and feel at least decent about buying on a dip like that.
Hill: We are over a week away before Christmas. If you’re like me, you’re looking to do some holiday shopping in the next week or so.
Moser: I think I’m about done with all mine. Can you believe that?
Hill: Well, hang on, because I’ve got two ideas for you and the dozens of listeners. Oh, Yum! Brands shareholders have got to be excited about this. KFC announced it is selling logs for your fireplace that smell like the Original Recipe fried chicken for just $19. You know what?
Moser: For just $19?
Hill: Just $19!
Moser: For a log?
Moser: Holy, cow!
Hill: I don’t buy fake logs, so I don’t know… look, you’re paying for the scent. You’re paying up for the scent. I feel like… if it’s done well, [laughs] that could be all right. First of all, let’s be clear here — $19 is less than you’re paying for one of those scented candles at Bath & Body Works.
Moser: That’s true. It’s probably more than you’re paying, though, for a bucket of chicken. You could probably just go get the bucket of chicken, stick it in the oven or something, and then your house starts smelling like chicken that way, right?
Hill: [laughs] That’s true. I wrote this on Twitter , there’s a nonzero chance I would buy one of these. I’m not saying I’m going to buy one of these, but I’m tempted.
Moser: You’re not saying no.
Hill: I’m not saying no. That’s what I’m saying. I’m curious if you have another food-scented or beverage-scented log that you say, “You know what? I am going to buy that.” For me, it’s Cinnabon. Anytime I’m in an airport, if I’m walking near a Cinnabon — by the way, are there Cinnabons that aren’t in airports? Maybe there are. That’s the only time I encounter them. They smell so good, and I never buy it, because it’s never as good as it smells. It smells so amazing! So a Cinnabon-scented log, I would be very close to just saying, “Yes. Here. Shut up and take my money.”
Moser: That’s funny, because that was one of the names that crossed my mind first. I ultimately came down to one of these two, though. My logic is, bacon to me is one of the best smells ever. Whenever you’ve got an odor problem around your house, you throw a slab of bacon in the oven and just get that thing going, it fixes everything. So, I do like bacon a lot. But that’s pretty easy, because I can just go buy a side of bacon and throw it in the oven.
Now, bagels are a little bit more difficult to make. So, I thought maybe, if I had an everything bagel smell. Those smell pretty good. If you have an everything-bagel smell in the fireplace, along with a slab of bacon in the oven?
Hill: [groans] Now you’re talking! Let’s bring in producer Dan Boyd to see if he has any thoughts on this. Let’s face it, Dan’s a man of opinions. Dan, is there something, whether it’s everything bagels or Cinnabon, is there something where you would say, “I’m not buying the KFC-scented one, but I might throw a little bit of money at this.”
Dan Boyd: No. This is stupid! I don’t know about you guys, but in the office here, when people have delicious lunch and I haven’t eaten yet, it stops me from doing sensible things like getting a salad or good-for-me food. And then I’ll go out and get like three pounds of barbecue and eat it all in about 20 minutes, and then feel sick for the rest of the day. I cannot imagine having a log in your fireplace that smells like fried chicken is going to help people make good eating decisions.
Moser: He’s got a point!
Hill: He’s got a very good point! All right, maybe I can interest you in the second idea for people who are looking to do some last-minute holiday shopping. That is to go to The Motley Fool podcast shop and get some podcast and investing swag for the one you love.
Boyd: I mean, if the one you love loves Motley Fool podcasts, then I think that’s a great idea. But if you’re down to The Motley Fool podcast shop for somebody who’s never heard of us before, maybe you need to reconsider your Christmas or holiday shopping strategies.
Moser: Somebody who’s never heard of us before? I mean…
Hill: We have dozens of listeners, Dan! I’m sure people have heard of us.
Boyd: At least two dozen listening to this.
Moser: Dan, what if you had a log that emanated the odor of a nice Irish field after a rainfall? You got engaged in Ireland, right?
Boyd: I did. See, that would be wonderful, because a freshly rained-upon meadow in Ireland doesn’t make me want to eat fried chicken.
Moser: Right. And it probably puts your wife-to-be in a good mood, right?
Boyd: Certainly, it does. I just want to pull back the curtain a little bit, we record this episode before lunch. And now, all this talk about fried chicken is heavily incentivizing me to make some bad decisions about lunch today.
Hill: All right, we’ll move off of the fried chicken. Let me bring it back around. For those who are looking to do some shopping, or even just to get a little swag, maybe this is what you do, you send it to someone in your family and say “Hey, go to shop.fool.com because they’re having a big holiday sale. Everything is on sale. Mugs, T-shirts, women’s cut T-shirts, hoodies, everything.”
Moser: I have to jump on that.
Hill: Everything is on sale at shop.fool.com . And, yes, we have podcast swag. We also have general investing swag, as well. Check that out when you get a chance. Big holiday sale at shop.fool.com .
Jason Moser, always a pleasure, my friend!
Moser: Thank you!
Hill: As always, people on the program may have interests 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. That’s going to do it for this edition of MarketFoolery . The show is mixed by the hungry Dan Boyd. I’m Chris Hill. Thanks for listening! We’ll see you on Monday!
Chris Hill owns shares of PayPal Holdings. Jason Moser owns shares of Markel, Mastercard, PayPal Holdings, Square, Twitter, and Visa. The Motley Fool owns shares of and recommends Markel, Mastercard, Netflix, PayPal Holdings, Square, and Twitter. The Motley Fool owns shares of Visa and has the following options: short January 2019 $82 calls on PayPal Holdings and short January 2019 $80 calls on Square. The Motley Fool has a disclosure policy .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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