Asit Sharma: I think those international sales are pretty interesting because they're differently composed than the US sales. Walmart's been investing around the globe, and not just in the same type of formats it has here in the US. In the call, CEO Douglas McMillon, Doug McMillon, called out stuff like India's flip cart operation, which is more like Amazon.com than it is Walmart. It's a big e-commerce operation over there, and PhonePe in India, so P-H-O-N-E-P-E, which means like on the phone or using the phone. That's a payment's business. Then they talked about trends in China, like Sam's Club in China, which is like the US format, except for half of those sales, they're being digital because China is such an app-based society. We're starting to see some of these investments around the globe pay off, and they're a little bit higher margin than the traditional Walmart operation. That stuck out to me.

Ricky Mulvey: This may conflict with what I thought previously, but they're also seeing a lot of the wealthier shoppers trade down for Walmart. Maybe, Asit, that is a sign of at least maybe not a recession, but inflation really hurting people. One other note that I thought was interesting in the call is they're seeing pickup growing faster than in-store or club sales. Remember, picking up from the grocery store during the pandemic. Asit, I thought everyone was going back in. I was a little surprised to see that trend continuing now in 2024. How about you?

Asit Sharma: I don't think I'm as surprised also from the call. This is, again, CEO Doug McMillon. Around the world, our customers and members continue to want four things; they want value, they want a broad assortment of items and services, they want a convenient and enjoyable experience buying them, and they want to do business with a company they trust. That third point there, Ricky, they want a convenient and enjoyable experience buying the merchandise. That really works well with the trends of delivery and pickup. The way Walmart is structured, as we all know, the floor space is huge, so getting around takes a lot of time. If you're able to use the convenience factor of a pickup or delivery, you're going to do that in this day and age. That's a trend I think that's just going to keep growing post-pandemic.

Ricky Mulvey: Fair enough. I keep thinking about the Walmart produce aisles, which there is a high amount of variability in, and I'm surprised to see so many customers continuing to trade off for that.

Asit Sharma: You pay your money, you take your chances if you want convenience.

Ricky Mulvey: Here's another part of this. Walmart, Costco, big companies, and they have solidly outperformed the S&P 500 over the past 12 months. In that time, the S&P has returned 24%. Walmart is at about 40%, Costco, almost at 60%. I'll throw Kroger in there as well as a shareholder. That's at just 11% underperforming. When you look at this trend, these grocery stores, some of them just really kicking the S&Ps, but what does that say to you? Does it say anything at all?

Asit Sharma: To me, it shows the power of scale. Yeah. I do talk about this a lot, but look at these returns you're pointing out. If you took a dollar bills, split it into pennies, you can't physically do that. Well, let's just start with 100 pennies. I'll put you on the spot, Ricky. Guess how many pennies both Walmart and Costco take home for every 100 pennies that they sell in profit.

Ricky Mulvey: Two.

Asit Sharma: You're very close, 2.8 something.

Ricky Mulvey: That's great.

Asit Sharma: I didn't look that up, by the way. Hey, I think you are just on fire today. That's pretty good. Better than I guessed actually when I looked this up. But here's the difference. If you grow sales at 3 or 4 or 5%, you can work on your operating margin. You can do pretty well with huge numbers if you're selling in the hundreds of billions. Walmart increased its profits by about 500 million this quarter versus last quarter on just a little bit of top line growth. Investors start to appreciate that. If you've got a huge funnel, what comes out at the bottom can be significant if you are selling more than almost any other company on the planet. So far, Walmart still sells more than any other company on this planet.

Ricky Mulvey: That's one reason it has is what you like to call pricing power. But it's going in the other direction, CEO Doug McMillon. You called him Douglas earlier. You're very much on your formality game today.

Asit Sharma: Well, you told me that we were being formal. You split up my contraction. I was like, all right, I'd better be on point here.

Ricky Mulvey: CEO Doug McMillon saying, "For the quarter, both Walmart US and Sam's Club US were slightly deflationary overall." You very rarely hear CEOs bragging about how they are lowering prices. But in this case, do you think deflation is a good thing for the pricing leader?

Asit Sharma: Yeah. First of all, for the lay person, that just sounds so flat and sad. They were deflationary. But of course, what he's saying is, we were able to lower prices, as you point out, so exercising pricing power in the other direction, not raising prices, but because of cost efficiencies being able to lower them a bit to entice customers. I think this is good to a point. Just think of it as like a rubber band when you've got a period of extended inflation. That pricing power is going to expand out, but the best retailers are going to let it collapse a little bit back to equilibrium when they feel like they're just at that sweet spot where they've enjoyed a little bit of the pricing power. They don't want to lose their customers, so they pull those prices back. I don't see them really decreasing too much beyond this unless there's a change in commodity prices, and they start heading significantly in the other direction.

Ricky Mulvey: Let's talk about retail as a whole because we got some retail sales data today up 1% month over month. Now, a lot of that has to do with large auto sales gain, is a lot of dealerships could not sell cars in June due to the CrowdStrike outage, but we also got data just zooming out on the first seven months of the year. That's where I want to focus because there's some interesting trends here. One is that restaurant spending is up 5% year over year. Non-store retailers, like your electronic stores, that's up almost 9%, but you also have home furnishing stores, which maybe in the same category as Home Depot a little bit, down 6%. Restaurants, electronics, up, furniture down. Are you seeing yourself in any of these spending trends, or maybe the companies you own, if we want to make it investing here?

Asit Sharma: Yeah. I can see a little bit of myself in here. That restaurant spend going up 5%, I do think I'm eating out a little bit more every year. I like to eat out, and I wonder if they're including the amount that we tip in those totals. Some places which we weren't tipping before, maybe those of us who go to a local baker just tipping a little bit. I think we've been trained during the pandemic, post pandemic to remember that that's a local business, we should support it. I don't think twice now. I know it aggravates some people. You hit the button, and they put it right in front of you these days, and almost seems like I'm really not here for the service, I'm picking up a good. But if it is a local business, I say support it. Now, off of that tangent, let's just hit one more of this. Combine those first two things you talked about. Furniture Home and Furnishing is down 6%, but non-store retailers, up almost 9%. I do think again, there's some of that convenience factor going on there, but we'll point out there are certain companies that do a little bit of both of this.

Take Williams Sonoma, for example. That's a company that I own, and they are a home furnishings company, and they also have a non-store retailer or big online commerce component. They're being able to have a buffer in the fact that we're buying lists of furnishings, just by the fact they run this really great branded operation among multiple brands, and they execute very well. That company has done extremely well over the last couple of years. Just to make a larger point here, Ricky, that you can, as a business, go against the grain, go against the trend if you're focused on your business and not always worried about how the customer is going to act. You have to keep that in mind, but you have to put out just a very quality product and make sure from there, you're executing on all aspects of the business.

Ricky Mulvey: Well, and the interesting thing about Williams Sonoma is that is very much a luxury retailer. The people who are shopping at Williams Sonoma may not be feeling as much of the effects of inflation as those going to maybe, let's say, some lower priced home furnishing stores. I want to move to this excellent long form article in Bloomberg Business Week. It's about Ozempic. The title is what happens when Ozempic takes over your town, taking a look at Bowling Green, Kentucky, which now has the highest concentration of people on weight loss drugs, at 4% of the population. If you look at a very coastal city like Brooklyn, New York, we're looking at closer to 1%. Asit, the reason I'm so interested in this, one is because I'm an Eli Lilly shareholder. But number 2 is, I'm in this place where I really think the effects of these weight loss drugs are going to be really change society. I think they're going to affect us in ways that we don't fully comprehend, but I also think there's so much investor hype around it that maybe I'm reconsidering that position. Within the article, it talks about some of the side effects for the economy, which is that med spa parking lots are full. This is where people are getting compounded GLP-1 medications. The local gyms are unsure if Ozempic is adding more customers to their business, and restaurants are full. When you look at this trend, which, honestly, might be the greatest marketing material that has ever existed for a company, which is someone you haven't seen in six months, and you go, "Wow, you've lost 50 pounds. What happened?" I can't think of one better than that. What economic side effects are you watching after I just delivered that word solid to you?

Asit Sharma: One is, what are the follow-on effects on other businesses? Right now, there seem to be so many washes, so things bounce out against each other. You mentioned the fact that in this article, the businesses around town, especially the restaurants really haven't dropped off. People are ordering a little less, but they still want the social experience. I'm also just thinking about what it means for consumer goods companies who have to adapt to this. The article mentions grocery stores. I believe Kroger is mentioned in the article as an example of a company that's adapted to potentially lower sales. Walmart, we talked about Walmart earlier in the segment. They mentioned GLP-1 drugs a few quarters ago as a potential headwind on their business. They're fighting back now. All these big grocers are mentioning in their calls that, look, we're selling more of these drugs in our pharmacies. Where we look in society, except for maybe some smaller gyms, perhaps. It seems like the effects are that you buy the drug, you lose weight, you really don't change your habits. This is quite interesting when you think about the opposition between industries. In one industry, the consumer goods industry that provides a lot of package snacks and drinks. Great line in the articles, the part of the Kroger pharmacy, which is actually counseling people to take these drugs is blocked off from view by a mountain dew display. This is what the package good industry wants. They want to still be able to sell their stuff, even though people have decreased appetite. So far, there doesn't seem to be a particularly downdraft effect on that industry. Just how things are being held in opposition is really strange to me. But go ahead. You had a follow-up question on this.

Ricky Mulvey: Yeah. I want to talk about the hype because there's the weight loss elements, and they're finding more potential uses for this, and I want to be careful how I phrase it. There are some studies that suggest that these GLP-1 drugs may be helpful for things like potentially slowing Alzheimer's disease for some addictive behaviors such as smoking and maybe drinking, where it's maybe not stopping folks who are drinking completely, but maybe they're stopping after one beer. Goldman Sachs estimates GLP-1s to be a $130 billion annual market. Let's set that aside. We have a $130 billion annual market. Now, the market cap for Eli Lilly has exploded over the past few years from about 250 billion to almost 900 billion. That's a lot. I think is all of this hype and then some priced-in.

Asit Sharma: It's hard to say. I think as an investor, the best advice I can give to newer investors who are seeing this type of thing, maybe for the first time, like you have a big trend, a lot of capital flowing into it, results on the ground, which has more money flowing in, and then the hype factor, is to just be a little careful. Don't overload in a particular vehicle. In this case, don't overload in a particular pharmaceutical company, but I do like the idea of maybe spreading your bets around. It's a regulated industry, so we don't know what the long-term effects are going to be on this class of drugs. So far, it looks promising for weight loss, and there's very interesting preliminary indications. As you mentioned, for all types of disease states, that doesn't mean that a risk out of the blue can't surface in a few years. You want to just follow along. If you're very interested in this, there are already some thematic ETFs. I would advise they're not very liquid right now and they tend to concentrate in a couple of names like Eli Lilly. But as an investor, you can do your own homework and maybe put together a small basket of companies.

Asit Sharma: My best answer to you, Ricky is, I really can't tell you how much is hyper priced in because the R&D is still pouring into this idea and commercialization is going to take a few years. I hope we can just return to this every few months and exchange ideas on what we're seeing.

Ricky Mulvey: Something Team Buyers has said is that for something transformational, we often overestimate the effects in the short term and underestimate the effects in the long term. I think that's a good place to end it. Asit Sharma, appreciate you being here. Thank you for your time in here insight.

Asit Sharma: Thanks a lot, Ricky. The swiss buck.

Ricky Mulvey: Next week, a lot of the Motley Fool Money crew is going to be at the Podcast movement convention. If you're attending in Washington, DC, come say, hey, if you'll be there. We'd love to chat. Up next, Motley Fool analyst Buckhartzol, joins me to discuss Shift four. A payment processor playing in one similar sandbox is toast with a wild mind leading its way. We've talked about the restaurant payment processor toast on the show quite a bit. It's capturing a lot of investor attention, but we haven't talked about one of its primary competitors as much. It's called Shift4, which plays in a similar vertical, but also some others. Buck, let's differentiate these companies a little bit. Who are the customers that Shift4 is going after with their payment processing solutions?

Buck Hartzell: There is some overlap between them and toast, as you say, and I'd say that's mostly in the restaurant vertical, Ricky, when you look at it. I'd say, if you look at Shift4, though, they're a diversified business. I'd say about a third of their business is coming from restaurants. When I say restaurants, that's a big term. It's mostly table service places. It's not quick service or fast food restaurants or the coffee shops or bakeries. Those are different people play there. But they're in the table service restaurants. It's about a third. Then you have hotels, which was their second place that they moved into. Then the third vertical, which is really just evolving right in front of our eyes here is in stadiums. You see stadiums and events, and I would also throw in their specialty retail stuff as well. About a [inaudible] third?

Ricky Mulvey: One of the most difficult things with I think is a retail investor judging any of these payment processing companies is figuring out how they're different from other ones. If I'm a restaurant or a hotel, why would I go with a Shift4 versus not just toast, but block, ad, any of these other payment processing companies?

Buck Hartzell: You mentioned there's some big ones, and I'd say, particularly in the restaurant space, that is super competitive and super cut throat. That's originally where these guys Shift4 cut their teeth. Their area that, I said, table service, they've done really well. But what you look at as somebody who buys it is something, well, you want total liver cost, so you want a low cost product that allows mobile ordering and all the different stuff that you see now at restaurants, where you used to be able to, you have to give your credit card to somebody, you hope they don't copy down the number when they take it in the back and some magic happens, they charge it. Now you can do it right at the table. For some of these stadiums, they obviously are doing ticketing. That's a huge deal for Shift4, but also mobile ordering and all that stuff where you can just order right from your seat and do all that stuff. They have Sky tab is what their point of sale solution is called. It's a Cloud-based system that also you have a little tablet or whatever else. You can also do mobile ordering from there. That's their solution. It's a technology solution. It's a low cost product that basically, I'll put it in Team Buyers way. It solves a lot of problems for people who run restaurants and venues.

Ricky Mulvey: Something that investors have dinged Shift4 for, and I don't know if it's fairly or unfairly is the company's acquisitiveness. I don't have an opinion on it, so just to set the table, how does this company use acquisitions?

Buck Hartzell: I'm going to reframe that a little bit. I'd say, first of all, at the Motley Fool, and I'd say myself in general, I can't speak for everybody. But I think generally the research has shown that acquisitive companies it's difficult. It's difficult to make acquisitions well. But so we're skeptical, I think at the outset. But what we see here with Sheft4 is a company that was founded by Jerk Isaac man literally in his parents' basement when he was 16 or so years old. He's been running this for a few decades now[laughs] and growing the business. What they've seen is that you can hire a whole bunch of salespeople, load them up with stock competent incentives and different things and go in be competitive and try and win over restaurants and venues, or you can go out and buy competitors, and by definition, you get their customers. They've done the latter, they've done acquisitions and they've done them very well. What I've seen is people that do acquisitions well, they're rare, but the ones that are good at it can create a ton of value. One of the things that I think was a few things that they do differently than a typical acquisitive company. But one of them is they don't do auctions, so they're not doing bidding wars against bank. They proprietarily source their acquisitions, and what they do is they come in and they buy them, and then they basically blow up the business model. The companies that they acquire may have a lot of one time one off revenues, selling hardware or selling software once or doing whatever else. They come in and they basically remake their business model. They introduce the the sky tab, they get those customers over there, they cross sell them other products, and then what you see is over time, there's a high proportion of recurring revenue. It's a much higher quality base. At the beginning, it'll go down their revenues, and then they come up The recent conference call, they gave two examples of those where they raised the revenue from that company seven fold after they acquired it. But of course, it had to go through this down period and convert their customers over. They're one that is a serial acquirer. I don't think that's a bad thing. We notice when you look at the financials of this business, they haven't diluted shareholders very much on average about 2% a year, and that's really good. All the benefits of those acquisitions, first of all, they've proven they can do them at good prices, they've proven they can run them better. Then most of the value has accrued to shareholders because they haven't just paid any price and gone out there in auctions and given lots of stock away in order to do them. But payments is a scale business. You can organically go out and win people and win them over or you can acquire them. They've done more of the acquiring side, and it's worked out wonderfully well. I don't make a distinction.

Ricky Mulvey: It looks a lot like a customer acquisition strategy than bolt town acquisitions.

Buck Hartzell: Exactly.

Ricky Mulvey: You mentioned the verticals. Is there one stadiums, hotels. Now they're in gaming, casinos, sports betting, that kind of thing. I think CEO Jared Isaacman was the first person to make a sports bet from space when he was flying over Las Vegas. Restaurants, which is what they started with. Is there any of these that are particularly interesting to you as an investor following this company?

Buck Hartzell: They're all interesting. But I think the one that's given investors a nice opportunity to get shares at an attractive price has really been the larger clients around stadiums and those types of venues. Because what you see, even when you announce a deal with them, the load times are much longer. Let's say you get a stadium, a big European soccer stadium. Well, it's the end of the season, so you have to wait til next year to onboard those till you see any benefits from the acquisition and not an acquisition, but the new customer. Then the other thing you see with these large venue stadium deals is the margins are much thinner than what you'd have if you sold a mom and pop restaurant down the street. These are big deals with a lot of volume, and so margins get hit a little bit, and that's fine. They're still going to make plenty of money on these and obviously, the first move into those stadiums is doing concessions and that stuff. But then they've had a lot of success winning over ticketing, which is a much larger number and selling all the season ticket holders and all that stuff. Anyhow, I'd say stadiums for me is really impressive, and the amount of new folks that they have coming over from there is pretty mese.

Ricky Mulvey: There's been a couple of signals from the company, we'll say past couple of years that have been interesting. Last year, the CEO Jared Isaacman told investors that the company was undergoing a strategic review. This usually means that the company wants to go private. He mentioned that being public is a bit of a distraction. Earlier this year, Bloomberg reported that Isaacman said the buyout offers just didn't adequately value the business, not that it's no longer for sale. Now you're also seeing Isaacman buying up stock on the open market. What did you see these signals meaning for Shift4 retail investors?

Buck Hartzell: Originally, when I heard the term strategic review, it scared me [laughs] to be honest with you Nuve is a company in the same space, that's had some similar things go on, and they elected to go private. Unfortunately, what that meant for passive shareholders like myself was we had to sell out a bargain while the insiders kept their shares. That's the worst of all outcomes. The stock has some volatility on the downside, and then they go private and then you have to sell out, and maybe they come back to the public markets later at a higher price. But refreshingly,what Isaacman said, Shift4 was, he's not going to do that. He's perfectly aligned with other shareholders. He basically said, we're a nuisance in the industry. You know what? You can buy us out, but you're going to have to pay up for it. I'm fine with that as a shareholder. I think the good news on that strategic review front is, they're not selling the company out from us, or forcing us to sell it at a bargain price while insides keep shares. They also said, hey, at the right price, and they're growing at a huge rate. If they get a price that's reflected, they'll go away. I'm OK with that.

Ricky Mulvey: Isaacman doesn't think the open markets giving his stock a proper price, considering he's buying up shares.

Buck Hartzell: Well, I would say he's done in the past several forward contracts where he's basically taken some cash up front, but kept his voting right in those shares and he's gifted some of that to charitable organizations, but he keeps his voting rights. I think and there's kind of caps on that, but he keeps the upside when he gets cash out, but he still gets his voting rights, and so he's done some things where it shows that he believes there's upside in the stock. Certainly buying stock on the open market, which I think he did recently at around $67 a share and it's at 75 today. The other thing I'd say is they buy back stock, too. They bought back some in the quarter. They bought back some since they've been public, and they've done it at attractive rates.

Ricky Mulvey: CEO Jared Isaacman definitely has beef with the valuation saying on the latest earnings call, "If we were simply known as the toast of hotels and stadiums, we'd probably be more appropriately valued". This is a company, while it's been around for decades. It still has impressive revenue earnings, free cash flow growth. It's raised guidance. But if you look at the earnings price tag, it doesn't look like a growth stock. What isn't the market buying about Shift4s growth story?

Buck Hartzell: I think Isaacman is part of that. To be honest with you, we haven't really talked about him, but he's a colorful character. Flies around in airplanes, but not just airplanes, jets, he's been the space, and the credit to them. I think since they've gone public, and they've been public for 17 quarters now, they've bought back 6.5 million shares at an average price of 54. It's $75 stock right now. It's not just Isaacman buying on the open market, but the company has bought back shares, and they can do that because they have a history of positive free cash flow and generating profits, which I think a lot of the technology start-ups have not prioritized cash flow in the way that Shift4 has. I'd say, what I've learned over many years of investing, if you look at people that are founders, that are visionary folks, they're not cut from the normal cloth, Isaacman is not either.

I think he's a little bit of a lightning rod for some folks, but I'd say I've learned, you don't found the company at 16 in your parents bases, none of us have done that. You don't build it over decades to be a multi billion dollar company with plenty of critics along the way and question marks, it is hard to do, you need to be a special person, and those people are usually optimists. I think when they look at their business and they know it, they've run it for a long time, they usually can recognize when the market is saying, hey, we don't think you can grow this way, and just because you go through acquisition, that's not going to work. I would say, arguably, we're coming into a time where it's a much better time to be an acquisitive company. We went through the time with 0% interest rates where valuations and multiples were sky high, and Shift4 did fine, by the way. But guess what? Now we're in a part where interest rates are much higher, and some of those firms didn't operate nearly as profitably, and their access to capital is not that great. It's a wonderful time for Shift four to be coming in and buying some of these companies.

Ricky Mulvey: Morgan Housel would call him a wild mind and off. You get both sides of a coin, and you don't get one without the other. Good. I think that's a good place to end Buck. Appreciate your time and your insight on this.

Buck Hartzell: You're welcome. Thank you very much.

Ricky Mulvey: 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 anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. 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. Asit Sharma has positions in Amazon, Costco Wholesale, and Williams-Sonoma. Buck Hartzell has positions in Shift4 Payments. Ricky Mulvey has positions in Eli Lilly, Home Depot, and Kroger. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, CrowdStrike, Goldman Sachs Group, Home Depot, Walmart, and Williams-Sonoma. The Motley Fool recommends Kroger and Shift4 Payments. The Motley Fool has a disclosure policy.

Walmart Wins Bargain Games was originally published by The Motley Fool