By coinnews 
00:00 Speaker A
It’s a big noisy universe of stocks out there. Welcome to Goodbye or Good Buy. Our goal is to help cut through that noise to navigate the best moves for your portfolio. Today, we’re scanning consumer-facing stocks. I’m here with Chad Morganlander, Washington Crossing Advisors’ Senior Portfolio Manager and a repeat guest here on Goodbye or Good Buy. It’s good to see you.
00:19 Chad Morganlander
Good to see you as well.
00:21 Speaker A
All right, let’s get to your buy stock first of all. This is O’Reilly Automotive. As I mentioned to you in the break, we’ve been singing the jingle all day since we talked about O’Reilly. The share is up pretty handily over the past year. So let’s talk about why you like it. First of all, the size and scale, and then different types of customers that they service. So explain to me what you mean.
00:43 Chad Morganlander
So they have, they do it yourself for a customer as well as they actually have the commercial customer. Their biggest leverage here is that they have the logistics to get the product to the end customer in a really quick amount of time. If you are mechanic, you need to get that, that, that product that day, and that’s what they do best.
01:08 Speaker A
Oh, interesting. Okay. And let’s also talk about the differentiation strategy here, um, in terms of, you know, it speaks partly to what you were talking about, the different customers, but also what they’re offering them.
01:22 Chad Morganlander
The customer service is extraordinary. You walk into, to one of these places, and before the door even shuts, they are asking if they could help you, the manager approaches you. It’s really a big differentiator when you talk about retail. Uh also along the lines of their, their pricing. They are competitive, and also on the back end, uh they do diagnostics. So you go in there, they try to help you figure out what’s wrong, and then they try to sell you the product at that point of time.
01:54 Speaker A
I have to ask a quick follow on the pricing front because obviously, some of its products are going to be affected by tariffs. So do, do they seem to have pricing power? Or how is that sort of playing out?
02:08 Chad Morganlander
So it seems as if about, about 30% of their revenues come from Southeast Asia. Uh, they’ll be able to pass along some of that to their customer. Others they will have to go back to the manufacturer and actually renegotiate. So I, I expect that if there’s any company that will be able to handle it, it’s with the size and scale that O’Reilly has, that they will be the one that will benefit from this type of unsteady environment within the product, within the product line.
02:41 Speaker A
And let’s talk more then about the base upon which they’re building and navigating that environment. And that’s the sort of steady growth that they have been seeing.
02:51 Chad Morganlander
Right. They are not across the United States as of yet. Their acquisition strategy is to tuck in other small retailers and auto part companies. They are starting to slowly but diligently expand within Canada and Mexico. Uh, this is one of the best to run retailers, I believe, in the country.
03:11 Speaker A
Gotcha. And then beyond the country, I guess as they go. But let’s talk about some of the things that maybe could slow it down a little bit, even though they are expanding. They are not expanding as much as their competitors have geographically.
03:26 Chad Morganlander
So they do have that issue, but they also, for their top-line growth, you could see that incremental revenue growth could be quite robust doing part because they don’t have yet that national footprint. Overall, we believe that they will grow around 7 or 8% on the top line through either buying or opening up stores. They have around 150 stores that they are opening up each and every year. And the store base is roughly about 6,000 stores nationally.
04:02 Speaker A
Okay. That’s a lot of stores. Yeah. Um, you talked about how they have the do-it-yourselfer and the commercial business. Is the commercial business a lower margin business?
04:13 Chad Morganlander
This could be a competitive side. And this is something you have to keep a careful eye on. So they are, there’s the AutoZones of the world, uh, and a lot of other competitors like Genuine Auto Parts. So that could be a more competitive environment with bigger contracts that they have to get and bid on. Uh so that’s one maybe perhaps a concern that you may have overall. But over the long run, we think that the long-term growth trajectory is quite robust, and they’ve got the wind at their back.
04:44 Speaker A
All right, let’s get to the stock that you do not like. And that is one we’re just talking about. It’s Macy’s, which, as we know, has tumbled over the past year. I think the drawdown is about 50% or so. We were just talking about its latest results with our Brooke DePalma, and here, the competitive landscape, I mean, can you even say the competitive landscape with other department stores? No, it’s really just online, specialty, the whole competitive landscape has sort of turned away from department stores, right?
05:21 Chad Morganlander
Yeah.
05:21 Chad Morganlander
I heard a great line this morning. It’s no fun if you don’t get to keep it. And the reality is that there is, you could take a picture, get a price real-time on Amazon or Walmart, and then just have same doors delivery. So it’s a race to the bottom when it comes to how and what their product offering is. And profit margins will be, will be pressured at all points in time. This is a levered company, uh, but we’ll go into that in greater detail. Yeah. Yeah, let’s. Uh, the leverage ratios are extraordinarily high. So for example,
06:05 Speaker A
So for what does that, they have a lot of debt is, is basically what, what that means, right? Yeah.
06:10 Chad Morganlander
Absolutely. They have a tremendous amount of debt. Yes, and they have properties and assets they can sell. But this reminds me a lot of JCPenney or Caldors or the other department stores of yesteryear.
06:25 Speaker A
Right. For people who are watching who say Caldor, what? Exactly, unfortunately, that was one of those department stores that did not make it.
06:35 Chad Morganlander
A hundred percent. That’s really the problem here, cuz you got, you are competing against Walmart and Amazon, and you can get that in less than six hours. Yeah. Product. So yeah, they really have an issue because they, this debt will perhaps have to be restructured.
06:54 Speaker A
And there have been some activists that have pushed them to sell off some of that real estate in order to raise cash and pay off some of the debt, but as of yet, they haven’t, you know, their flagship here in Manhattan, for example, they have not sold.
07:09 Chad Morganlander
Right. And the problem is they have about $1.8 billion of debt, and those properties, the valuations are going ever so slowly. They are melting away, meaning the valuations of these big boxes are melting away.
07:28 Speaker A
Yeah.
07:29 Speaker A
All right, and the last reason here, I mean this pretty much sales are going down.
07:33 Chad Morganlander
They are trying to rationalize their store line, you know, their footprint, and it’s contracting, which then accelerates the issue at hand. So, you know, we are very concerned about the equity holders of this company. Maybe there’s an opportunity by owning the senior debt if you’re one of those hedge funds, you know, leverage kind of guys that want to do that. Uh, but we suspect that one should stay away from this kind of company.
08:02 Speaker A
Okay, what could go right for Macy’s? This is a pretty rare one in our history of Goodbye or Good Buy.
08:10 Chad Morganlander
Nothing? Yeah.
08:13 Speaker A
You don’t think you don’t think that this is this is a stock that can turn around?
08:17 Chad Morganlander
I, Julie, I don’t see a clear path out of the woods, and the reasoning behind that is everything that I mentioned. Yeah. I think that if one wants to be an investor here, they may want to look at the credit, meaning the debt, and they want to be careful even on that, to go with the most senior debt instrument in order to probably to take an opportunity in the stock.
08:40 Speaker A
Gotcha. So obviously, you do not hold shares of Macy’s. Do you hold a position in O’Reilly?
08:45 Chad Morganlander
No, I do not.
08:46 Chad Morganlander
Yes, we do.
08:47 Speaker A
Okay.