Tuesday, 28 March 2023

Inflation, TikTok, and Other Hot Stories Investors Are Talking About

by Earn Media

In this Motley Fool Money podcast, Motley Fool senior analysts Emily Flippen and Ron Gross join host Chris Hill to discuss:

  • Fear of a recession vs. fear of banking contagion.
  • Whether social media giants like Meta Platforms and Snap stand to benefit from the drama around TikTok.
  • Ford Motor Company‘s plan to go from losing billions on EVs to having that part of its business be profitable by the end of 2026.
  • The latest from Block, KB Home, and Accenture.
  • Recent struggles from three pet products and services companies: Chewy, Petco, and Trupanion.
  • Apple‘s plan to spend $1 billion per year on theatrical releases.
  • The latest from Nike, Ollie’s Bargain Outlet, and Darden Restaurants.
  • Two stocks on their radar: Globus Medical and Donnelly Financial Solutions.

To get a copy of our free report “Top Stocks For Rising Interest Rates” just go to fool.com/interest.

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.

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This video was recorded on March 24, 2023.

Chris Hill: We got a packed show, so let’s get to it. Motley Fool Money starts now.

From Fool global headquarters, this is Motley Fool Money. It’s the Motley Fool Money radio show. I’m Chris Hill. Joining me in studio, Motley Fool senior analysts Emily Flippen and Ron Gross. Good to see you both.

Emily Flippen: Hey.

Ron Gross: How are you doing, Chris?

Chris Hill: We’ve got the latest headlines from Wall Street, including retail, restaurants, entertainment, and more, and as always, we’ve got a couple of stocks on our radar. But we begin with the big macro. On Wednesday afternoon, the Federal Reserve raised interest rates by a quarter percent, a move that was widely expected. But Ron, the aftermath was not as expected, exactly, in part because there was a dueling press conference with Fed Chief Jay Powell that was competing at the same time with a Capitol Hill hearing featuring Treasury Secretary Janet Yellen. It seemed like there were some competing soundbites in terms of what the federal government was willing to do in terms of the banks and assistance. But in terms of the interest rate move, this was one of the few times over the past year — and it’s been a year now — where like, this was what we were all expecting to have happen.

Ron Gross: For sure, the market had mostly priced it in and there’s a lot going on here. There was a lot going on before the banking crisis. So in case you wanted more, you’ve got more here.

After hiking the 25-basis points, Chairman Powell, he signaled that the situation in the banking sector might end its rate-increasing campaign sooner than previously thought, which in general, Wall Street likes. The sooner the better to stop raising interest rates. He said officials even considered skipping a rate hike this time as the banking situation worsened, which is just an interesting data point.

Powell hinted Wednesday’s increase could be the last one, depending on how significant the lending pullback is based on the bank run earlier this month. So a lot going on. The Fed removed the phrase “ongoing increases” from its statement. Everyone watches the Fed statement really carefully, and they compare this one to the last one, literally line by line by line to see what the Fed changed. In this case, “ongoing increases” removed. Again, Wall Street likes that. As you said, Janet Yellen was testifying at the same time all this is going on, and she said the administration wasn’t considering ways to provide broad guarantees to uninsured bank deposits.

The markets did not like that. The markets would prefer a bailout, although there’s obviously tons of problems with that — Google “moral hazard” if you want some more information. On Thursday, she walked it back a little. She said they’d be prepared to take additional actions if warranted, and that seemed to calm people down. So a lot going on here. The bottom line is, what are you going to wish for? The banking crisis tightens lending. We get a credit crunch, and therefore, the Fed can stop raising interest rates or the banking crisis goes away quickly and the Fed still has a little more interest rate increases to go and then things get back to normal? Maybe even we start to see rates coming down later this year or next year. That would be wonderful, and of course, the wildcard is recession.

Chris Hill: Yeah, Emily, as Ron indicated, for anyone who is wondering what role the banking situation plays in the Fed’s decision, it was pretty clear both from the statement and from Powell’s press conference that inflation is the north star.

Emily Flippen: I would say that’s true, but I would actually say it played a bigger role than people were possibly expecting heading into this before the banking crisis, before SVB‘s collapse, people were pricing in a 50-basis-point hike and inflation data was still hot. And the moment, though, that bank collapsed and fear came into the market, suddenly, 25 basis points was the almost foregoing norm. It was that halfway point between what they had previously expected around 50 basis points versus the alternative, which is, we’re really concerned about the markets right now and the banking sector, so we’re not going to do anything — a zero-percent hike or a zero-basis-point hike. I think the 25 is saying, we still see inflation as our north star, but we’re not so unconcerned with the rest of the economy that we’re willing to blow up the banking sector for the sake of getting inflation down.

Ron Gross: Yeah, I would say, as an analyst and just as a regular human being on this planet, recessions don’t really cause me to lose sleep. Down markets don’t cause me to lose sleep. Higher interest rates don’t cause me to lose sleep. Banking crisis and even the word “contagion,” Chris, gets me a little bent out of shape.

Chris Hill: Then why did you say it?

Ron Gross: I do get a little bit worried about how this can flow through the system and things can crumble very quickly. Hopefully, not like we saw back in the great financial crisis.

Chris Hill: This week, the CEO of TikTok testified on Capitol Hill that employees at TikTok’s parent company in China may still have access to some U.S. data from the app, but that a risk-mitigation plan is being put in place to stop that. The hearing before the House Energy and Commerce Committee showed the rare occurrence of unity between Democrats and Republicans, as both sides seemed very interested in banning TikTok here in the United States. In what cannot be a coincidence, shares of Snap, Meta Platforms, and Alphabet were all up during and after the hearing. Emily, one analyst called this an “unmitigated disaster for TikTok.” What do you call it?

Emily Flippen: I’d call it a nothingburger. I think it’s so interesting that there’s so much fear around what’s going to happen to TikTok. And I understand, you’re right. It’s a rare bipartisan decision or move to want to ban TikTok in the United States, but that move is unprecedented. It would be a massive change in policy, and it would isolate a huge number, especially of young voters who actively engage with TikTok on a daily basis. So I actually think it’s nothingburger because I don’t think the most likely outcome from this is a complete ban on TikTok in the United States.

When you mentioned Snap, Meta, Google, all up on the news, I think there’s an expectation that one of two things will happen. There’s a TikTok spinoff. This would be the most complicated option. I think it’d be the least likely option given its complexity, but basically, ByteDance takes TikTok, turns it into its own company entirely based in the U.S. That wouldn’t be that ridiculous, given the fact that they are, in fact, building, Project Texas, which is their U.S.-based data storage to remove any connection from the Chinese mainland, but it would still be very complicated. The alternative could be a sale of TikTok.

So, potentially, Meta, Snap, Google, one of these companies coming in and actually buying up TikTok’s assets, in which case, you retain the people who like to use the platform and it’s a benefit, presumably, to whichever company is acquiring those assets, depending on the price. But what I think is the most likely solution is actually that nothing happens here. Given the fact that TikTok has already achieved the scale it has, this is mostly political posturing. If you listen to the questions that our representatives asked, they were almost embarrassing. I know people in China are getting a laugh from the types of questions that the TikTok CEO is being asked. But I think the end solution is perhaps more robust U.S.-based privacy laws, which negatively impact all of these social media platforms equally.

Chris Hill: Yeah, there was a certain irony to TikTok videos being created from this hearing of members of Congress struggling to understand things like how Wi-Fi works and that sort of thing. The idea that a company like Meta Platforms or Snap or certainly a company the size of Alphabet would buy TikTok — there’s no way something like that gets by regulators, does it?

Emily Flippen: Regulators are incentivized, they’re part of the U.S. government, and so if they perceive to be the biggest risk to consumers actually being the fact that it’s owned by a Chinese company, then I don’t think it’s impossible.

Ron Gross: I think they’d rather see them go out of business and get all the customers for free, as they have nowhere to turn. How am I not seeing a headline: “Time is ticking for TikTok”? Journalists, please, feel free to use that.

So, what happens here? Project Texas — I just think that’s funny — happens. We store data here in the U.S. I’m no techie, but as far as I know, that doesn’t necessarily stop information from being used around the world, but it’s a start. We ban TikTok already from government phones and other devices, and perhaps additional regulation you think comes in. What would additional regulation even look like?

Emily Flippen: I think there’s two parts to it. The additional regulation I see coming in the form of changing privacy laws. We’ve already seen a lot of pushback from our U.S.-based large tech companies about the way they handle consumer data and privacy and, largely, it’s very negative. Consumers don’t like it. The organizations themselves like it because they make a good amount of money from selling this data. But regulators are aware of the fact that there probably needs to be some type of robust privacy overhaul to prevent a situation like this from happening again in the future.

But I also think there’s this impact that is much more political. It’s not about data or it being stored in the U.S. It’s the fact that there is a Chinese-owned social media platform that has a lot of influence over the way that Americans — especially young Americans — think. Even if it’s not to the point where we’re actually selling American data, it could be used to bubble up divisive topics. We’ve seen that happen in the past with foreign governments stirring up division in the United States and causing conflict. That’s what I think politicians are mostly worried about, and there really isn’t a good data privacy reason to make that happen. That could be part of the reason why they’re trying to force a sale of this platform or a complete removal of the platform from the United States.

Chris Hill: After the break, we’ve got the latest in automotive, homebuilding, and the war on cash. Stay right here. You’re listening to Motley Fool Money.

Welcome back to Motley Fool Money. Chris Hill here in studio with Emily Flippen and Ron Gross. This week, Block, the digital payment company formerly known as Square, found itself in the headlines after short-seller Hindenburg Research announced that Block was its latest short position. Hindenburg’s report accuses Block of, among other things, artificially inflating user numbers. The company issued a statement calling Hindenburg’s claims “factually inaccurate and misleading.” Emily, shares of Block down nearly 20%.

Emily Flippen: It’s a hard position for Block to be in when you’re the subject of a short-seller report, because as a business, you have one of two options, which is, you ignore the claims or you make a statement about the claims. It’s one of those situations where a business can be perceived as damned if you do, damned if you don’t.

In this case, Block did come out and say that they are exploring legal action against Hindenburg as a result of this. A lot of investors didn’t take to that favorably because they perceive any comment as a comment that is defensive as opposed to what many perceive Block should do, which just go on and continue with business as usual, prove people wrong through virtue of having a strong business and posting strong results. But my biggest concern, just for me as an investor, coming out of this wasn’t necessarily the way that Block responded to the report, but rather what that report is claiming.

In particular, the allegations that Block doesn’t have these robust anti-money-laundering laws or internal controls that could prevent fraud. The reason why this is my particular concern as an investor is because in 2019, Australian regulators had looked into Afterpay, which is the “buy now, pay later” platform that Block actually acquired, because they had their own concerns that Afterpay wasn’t complying with these AML laws. So, those concerns were ultimately remediated and all was fine moving forward, but there’s some precedent that regulators have looked at a business that Block owns under the same guise of concern. For me as an investor moving forward, that’s where my focus is. While we don’t know what’s happening, my opinion on the stock’s rapid downturn — and it’s only about between 15% to 20%, which is not crazy for these types of reports — but part of that, in my opinion, is investors reacting out of fear.

Chris Hill: KB Home’s first-quarter results were highlighted by profits beating Wall Street’s expectations and a $500 million share-buyback plan. Shares of KB Home up 12% this week and pretty close to a 52-week high, Ron.

Ron Gross: Yeah, the stock has held up well, and they did beat both Wall Street expectations and their own guidance. But despite that, results are actually pretty weak, so it’s interesting that the stock is holding up. I think it’s probably because it’s not surprising they’re weak in the current interest rate environment we’re in. It really should not have taken anyone by surprise. But just to look at some of the metrics, total revenue was down 1%, homes delivered down 3%, average selling was up 2%, so that helps a little bit, I was a little surprised to see that, but that helps a little bit, and margins were down 50 basis points, and that reflects what you would expect — lower profit margins on the housing side offset slightly by expense improvements as they try to stem the tide a little bit and make the best lemons out of lemonade, if you will.

They also took a little bit of a hit on their mortgage banking joint venture as higher interest rates took a hit to that business as well. You boil that all down and net income fell about 7%, which actually isn’t that bad, which is probably why the stock is holding up nicely. Earnings per share were actually flat because the company, as you mentioned, has been an aggressive repurchaser of stock and so that helps the earnings per share figure. Ending backlog was down 40%. So let’s keep that in mind for future quarters. Don’t be surprised if you see weak numbers going forward. On the call, CEO said interest rate economic uncertainties pose a large risk to near-term demand. Duh. That makes sense. But they are going to buy back stock when appropriate, selling about 8 times only. But these homebuilders only really sell for 6 to 10 times so don’t let that number fool you into thinking it’s cheap.

Chris Hill: Ford Motor says it expects to lose $3 billion this year on its electric vehicle division, but that it also expects it to be profitable by the end of 2026. Emily, you like Ford’s chances?

Emily Flippen: I actually do here. Speaking of companies that always trade very cheaply, if you look at Ford, this is a business that trades for less than 6 times earnings, has a 5% dividend yield, so it’s easy to look at that and look at the expanding opportunity for electric vehicles … and say, this is a good opportunity. I don’t mean to imply that it isn’t, but Ford does have a lot of hurdles to overcome. As you mentioned, they suspect they’re going to lose around $3 billion in terms of electric vehicles just this year, and that’s after dividing up their business into basically three new segments: their legacy Ford Blue segment, which is the traditional vehicles; Ford Pro, which are their services and their products; and then, of course, the Ford Model E, which are their electric vehicles.

As we noted, that’s not a profitable division right now, but by 2026, they’re hoping to get to an 8% operating margin, which would be less than businesses like Tesla, but to be frank, Ford doesn’t need to be Tesla to be successful when it comes to electric vehicles. They don’t need to produce as many as Tesla does to sell a fair number and have that be accretive to their earnings. It’s definitely their fastest-growing segment. They’re the second EV brand in the United States last year. They’re approaching breakeven with the segment at the end of this year. So actually, I’m a bit excited about what this means for Ford’s business. The downside of them breaking their divisions up like this does mean that we’re losing some color about their financing though.

Chris Hill: When you look at the Ford F-150, how meaningful that is to the business, and the electric version of that, they had some problems with that earlier this year, essentially, had to halt production, it seems like if they are going to get to profitability with the EV division, that’s got to be a leader for them. Right?

Emily Flippen: Certainly. As much as they may brag about the talent that they’ve been able to pull over from places like Tesla, they have had operational issues and getting these electric vehicles off the ground, issues in manufacturing. There’s definitely a steep learning curve, but the F-150 is going to be critical for them to do successfully to build up that brand trust with existing consumers.

Chris Hill: Accenture’s second-quarter results took a backseat to the announcement that the global consulting firm is cutting 19,000 jobs. That is roughly 2.5% of Accenture’s employee base. Ron, it’s not just the big tech companies that are getting lighter.

Ron Gross: Right. I still am a big fan of Accenture, but it’s hard to fight the decrease in IT spending that is going on right here, and you see it not only in their results but in the announcement of additional layoffs. All in all, though, the business is holding up. We’ll watch future quarters. Revenues were still up 5% in U.S. dollars, impacted negatively by 4% for foreign exchange, it would have been about a 9% increase in revenue.

Consulting revenue is down 1%, but their managed service revenue, which was previously known as “outsourcing” when companies come to them for certain tasks, was up 12% and so that held the business up. North America up 5%, Europe up 6%. Not too bad under the circumstances, with new bookings up 13% in U.S. dollars. So we’re OK, and margins were actually up slightly, which is encouraging as well. Earnings up 6% on an adjusted basis, pays a 1.7% yield on the dividend, just increased that 15%, 18 consecutive years of increases in that dividend. I very much like it for that as well. They did reduce their revenue guidance, but just a little bit, trading at 24 times EPS guidance — not cheap, not too expensive either, right in the middle.

Chris Hill: People love their pets, but this week, investors were not loving pet stocks. Details after the break, so don’t touch that dial. You’re listening to Motley Fool Money.

Welcome back to Motley Fool Money. Chris Hill here in studio with Emily Flippen and Ron Gross. Big week for the pet industry. Both Chewy and Petco issued fourth-quarter reports, but they couldn’t have been that great since shares of Chewy fell more than 10% and Petco, down more than 20%. That paled in comparison to pet insurance provider Trupanion, whose stock fell 30% on the news that Chief Financial Officer Drew Wolf is stepping down. Emily, there’s a lot there. Where do you want to start?

Emily Flippen: Well, let’s start with the fact that our fur babies are getting really expensive. That’s the overarching trend across all of these stories, is the fact that we all love our pets, but man, they’re pricey little buggers. Over the course of February, pet inflation was actually sky-high. If you thought inflation is coming down, pet inflation is actually still accelerating. February inflation for all pet goods and services was up nearly 11%. Pet food itself up more than 15%, so very expensive. That is showing up in both Chewy and Petco’s results. In fact, if you look at Chewy’s, just their fourth-quarter results, they were really strong. Their business grew sales, reached profitability goals, actually posted a profit of more than $6 million in the quarter, which was a surprise to the market, but they did have a decline in the number of active users on their platform, which I think scared some people.

Maybe people are getting rid of these really expensive pets, they are no longer using Chewy or they’re getting their pet food elsewhere. Those are the things that are weighing on investors’ minds, and the same is true for Petco. They had guidance for their same-store sales to actually decelerate and for full-year sales over the course of the next year to only be in the low single digits. So all of those things are causing some concern for investors, but I will say if you look at spin for things like pet healthcare, of which Petco and Chewy do have strong presence, that’s still growing really rapidly, so good for those businesses. And to really bring this story to an interesting conclusion, we have Trupanion, which partners with both Petco and Chewy to underwrite their pet insurance. But Trupanion had some bad news this week. Really not a good week for these pet companies.

Chris Hill: Not at all.

Emily Flippen: But they had announced the departure of their CFO, although it does seem like they’re going to be around for a while.

Ron Gross: You said his last name was Wolf?

Chris Hill: Yeah.

Emily Flippen: Yeah. I can’t make it up. They’re real.

Chris Hill: I think that’s a requirement that Trupanion executives need to have some sort of animal tie-in.

Ron Gross: CEO Canary let CFO Wolf go.

Emily Flippen: Well, if CFO Wolf was the only departure, I think the market reaction would have been different, but part of the reason why Trupanion shares were down more than 20% was because they had a departure of Trupanion’s EVP of pricing and their EVP of legal and regulatory. So some senior leadership here departing, presumably disagreements happening internally at the company, maybe around long-term strategy. We don’t have a lot of color, but needless to say, investors were not happy with any of these pet care companies this week.

Chris Hill: Well, just real quick. You mentioned the tie-in between Trupanion and these other retail businesses, but it really seems like Chewy and Petco are trying to become not just pet retailers, but pet health overall companies.

Emily Flippen: Well, you can understand why they want to be perceived as pet health companies. If you look at Petco, like I mentioned, their sales growing in the low-single digits. But over the last quarter, the segment that focused on pet healthcare grew 14%. So of course, you want [to say to] investors — “Hey look over here! Don’t look over here at the other goods, the discretionary goods that are falling.” But in the case of Chewy, my biggest concern — I’m a big Chewy fan. I use Chewy, I’m a Chewy shareholder. What really concerned me in the most recent quarter, not the decline in active customers, but the announcement that Chewy is potentially moving forward with international expansion.

This took me by surprise, because my impression is they haven’t even yet reached scale in the U.S., so why [would] you think about potentially spending so much money to build out distribution in different continents, foreign countries? That’s a really expensive endeavor, and we don’t have a lot of color about why management made this decision. I hope we’ll get that color in future quarters, but my fear is that it’s in response to a declining active customer base where they’re having to go internationally to acquire those customers amidst a broader slowdown, and that could potentially be a really expensive endeavor for Chewy right at a time when Chewy was just beginning to expand their margins.

Chris Hill: Nike’s third-quarter profits and revenue came in higher than expected, but shares were flat this week. The inventory situation is improving for Nike, Ron, but it is not where CEO John Donahoe wants it to be.

Ron Gross: Yeah. This was a solid report and I think the stock was a bit expensive at 32 times earnings, so some investors took the opportunity to maybe sell down the stock and it ended up overall being flat, as you mentioned, so not too much damage there. Overall, I think it looks pretty good, but as you say, they’re working through their inventory problem and it’s not over yet, but they’re doing a nice job. Revenue was up 14%, but 19% on a currency-neutral basis. Again, that pesky strong U.S. dollar impacting many, many companies. Nike Direct up 17%, wholesale revenue up 12%. In China, Nike did see a rebound in traffic in stores in January and February, but overall sales in Greater China fell about 8%. Important to mention, though, they were actually up 1% on a currency-neutral basis.

So if you’re looking at, is China improving? Is it hurting the business in general? You do have to look through some of the currency there. Usually, we tend to ignore it, but if you’re just focusing on the operational health of the business, it’s important to take a look. A strong demand for sneakers, Jordan Retro, LeBron 20. Apparel continues to be weak. That’s where they need to work through some of the inventory levels, but they’re getting there. Ended February with $8.9 billion of inventory down from $9.3 in November. They’re increasingly confident that they’ll exit the year with healthy inventory levels, according to the CFO, but I think you’re going to continue to see some of the higher markdowns hurt profit margins. Gross margins were down. As a result, earnings per share were down 9%, but they’re making their way through. They raised full-year revenue outlook — very important — but they did warn margin pressures will continue as they work out their inventory.

Chris Hill: Well, and you’ve got the new movie, Air, the Ben Affleck, Matt Damon movie about that creation of the Air Jordans. That’s got to help, right?

Ron Gross: It can’t hurt.

Chris Hill: Shares of Ollie’s Bargain Outlet up more than 10% this week, fourth-quarter profits and revenue came in higher than expected for the discount retailer. Emily, this is one of those businesses that flies under the radar. You tell me: Is this a time for a business like this, when we’re seeing inflation in other areas? Do discount retailers like Ollie’s get more attention?

Emily Flippen: Well, you would think so, and in this most recent quarter, it certainly looks that way. Same-store sales rose 3%, total sales were up 4%, and a lot of people are using this as an example to say, “Look, they’re a discount retailer. At a time when inflation is really high, consumers are really pressed.” But if you look at Ollie’s performance over the course of the last year or two, actually, a lot less pretty. If you rewind to this quarter last year, same-store sales had fell more than 10%.

In fact, total sales were down nearly 3% in the quarter, and that was also at a time when inflation was still really high, and presumably, there were a lot of retailers that were gutting their inventory, potentially providing extra supply to discount retailers, Ollie’s included. I think part of the reason why this business has struggled is because there’s more competition now in discount retailers. Ollie’s used to be this kind of special place, the only one of its kind — and it still is. If you’ve ever been in an Ollie’s, it’s unlike anything else in the world. It’s a total blast. The inventory is constantly changing. You never quite know what you’re going to get. But the downside about going to an Ollie’s versus the TJ Maxx is, when I walk into a TJ Maxx, I know I’m buying myself a T-shirt or a pair of pants or a dress.

When you walk into an Ollie’s, you’re probably there for a discretionary purchase. You don’t know what you’re going to buy, but you’re going on a little fun shopping trip, a little treasure hunt, and you’re going to get some piece of merchandise at a marked-down price. They don’t exactly have clear merchandising that would drive somebody to say, I need to go to Ollie’s today to buy X, Y, and Z. So when consumers are feeling pressed, not only is there more options when it comes to where they’re going to get there discounted items, but also, there’s really no incentive to go to Ollie’s unless you are trying to spend money, and not a lot of consumers are actively trying to spend money these days.

Chris Hill: Darden Restaurants is the parent company of Olive Garden, LongHorn Steakhouse, and the Capital Grille, and several other chains. Shares of Darden up a bit this week after third-quarter results were highlighted by same-store sales at Olive Garden rising more than 12%, Ron.

Ron Gross: Not bad. I’m so happy our man behind the glass, Steve Broido, is with us today — the biggest fan of Olive Garden out there.

Chris Hill: You’re here.

Ron Gross: They are getting it done. As you say, this is a solid report, solid guidance. Their strategy of “pricing below inflation” seems to really be resonating with consumers in addition to the breadsticks and the soup and the salad, and that translated into some pretty good numbers in this environment. Sales up almost 14%, same-restaurant sales up almost 12%. The total sales numbers were helped by the higher same-restaurant sales as well as the addition of 35 net new restaurants. But Olive Garden, everyone’s favorite, led the way, as you said — 12% increase.

Olive Garden, interestingly, makes up about 46% of the company’s sales and profits. So while, as you mentioned, there are several other brands in their portfolio, almost half is Olive Garden at this point. LongHorn Steakhouse was the next biggest segment. They had the best positive comps, up almost 11%, and then fine dining up almost 12%. Fine dining — Capital Grille, as you mentioned, one of my personal favorite steakhouses even though it’s a chain, and Seasons 52 is in that category as well.

Inflation, not surprisingly, did impact expenses. Food and beverage costs were up. Labor was down, interestingly, as were some other costs and marketing expenses. Operating margins actually widened here, which really helps bring the higher revenue down to the bottom line. Earnings per share up 21%, and that was aided by less shares outstanding because they, too, were buying back stock. They raised revenue guidance for the second consecutive quarter. They see fiscal 2023 same-store sales growth of 6.5% to 7%, trading at about 19 times their new guidance. But for a company that’s putting up 20% earnings growth, that’s not too bad. The company is paying a 3.2% dividend yield at this point, and they’re really executing well.

Chris Hill: And over the past 12 months, beating the market by more than 25 percentage points.

Ron Gross: Pretty impressive.

Chris Hill: Really impressive. This week, Laxman Narasimhan took over officially as the CEO of Starbucks. He was named incoming CEO last fall and has spent the last six months learning all aspects of the business, which included spending 40 hours of barista training. Narasimhan says he plans to work a shift at Starbucks cafes once a month. Emily, for months, the company had said he was starting on April 1, so I’m not entirely sure why he started nearly two weeks before that, but I’m a shareholder, I’m rooting for the guy.

Emily Flippen: Yeah. Joining a whole two weeks early after the world’s longest CEO transition. Needless to say, the market is not really responding to this news because this transition was expected. I do think that timing of the transition is interesting though, given the fact that Howard Schultz, who is the interim CEO, had just been called to testify before a Senate committee about Starbucks’ labor practices in the next, I believe, week or two. Just some interesting timing there. You can’t say if those two things coincide, but around the same time [the] government’s looking at Starbucks, wondering about the labor practices, the company is also bringing in a new CEO.

Actually, I like the idea of him working a shift as a barista. I worked at Starbucks when I was in high school myself. It was still, to this day, one of the best jobs. I found it very relaxing.

Chris Hill: Relaxing? Were you a barista?

Emily Flippen: I was a barista. Granted, I was in a unit that was inside of a grocery store. So I got maybe five customers an hour if I was lucky.

Chris Hill: Relaxing.

Emily Flippen: Again, like I said, very relaxing. But I like that type of exposure for a CEO. I think the big question though is that is Narasimhan just an extension of Schultz? This long transition period buys into the idea that Narasimhan is just going to continue a lot of the practices that Schultz has laid out. In fact, they said he plans on continuing this growth journey that Schultz has put Starbucks on, and part of that is, I’m not going to call it union-busting activities but it is something like, “Hey, we’re going to incentivize our employees that are not part of unions,” in an attempt to remind employees, “This is why we kind of serve you as a company.” Needless to say, the government and employees haven’t responded positively to those approaches by Schultz, but maybe it’ll be different under Narasimhan.

Chris Hill: Coming up after the break, we’ve got a couple of stocks on our radar. So stay right here. You’re listening to Motley Fool Money.

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. Welcome back to Motley Fool Money. Chris Hill here in studio with Emily Flippen and Ron Gross. We led the show with the latest increase in interest rates and our investing team has a special report highlighting five stocks they think are worth considering in this environment. It’s called Top Stocks for Rising Interest Rates.

The report is free just for trying out Motley Fool Stock Advisor, our flagship investing service, which comes with its own membership fee-back guarantee. You get 30 days to decide whether the service is a good fit for you, and even if you cancel, you keep the free report. Just go to fool.com/interest to get your copy of the report. Again, that’s fool.com/interest.

Shares of IMAX, Cinemark, and AMC Entertainment got a boost this week on reports that Apple plans to spend $1 billion a year on theatrical movie releases. It’s one more way to raise the profile of the Apple+ streaming service, and let’s face it, Ron Apple’s got the money.

Ron Gross: I was going to say, I’m a big fan of Apple, not necessarily a big fan of this report, but a billion — but what’s a billion?

Chris Hill: For them, nothing.

Ron Gross: Yeah, it’s interesting though. It’s interesting to think that theatrical film releases will somehow accrue the Apple TV+. That’s the strategy. I’m not sure I’m there. It will be interesting to see how that plays out. It’s still in the early stages, and this isn’t even from Apple. This is a report, I believe, from Bloomberg. So it’ll be interesting to see how it plays out. There’s different potential releases on the table from Martin Scorsese, some other Ridley Scott drama. We’ll see how it plays out. They don’t have distribution in movie theaters, so they will need a partner there. Would a successful movie in the theater calls people to then want to subscribe to Apple TV+? I think perhaps not. I don’t see the connection, but Apple certainly does.

Emily Flippen: I totally disagree. Who is watching Apple TV? I personally know very few Apple TV subscribers, but I do know they produce great content. So I think this is potentially a smart move for them to say, “Hey, look, we actually have some really high-quality stuff.” When you’re consuming Netflix or other low-quality low-budget entertainment, don’t forget, go to the movies, experience high-quality film, and then remember, “Hey, you can get that for a monthly subscription.”

Chris Hill: Ted Lasso, two words.

Chris Hill: I’m just going to say Top Gun: Maverick — you see that on the big screen, it gets you interested to watch it again on the smaller screen.

Let’s get to the stocks on our radar. Steve Broido, the original man behind the glass, going to hit you with a question, Emily Flippen, you’re up first. What are you looking at this week?

Emily Flippen: This week, I’m looking at Globus Medical (NYSE: GMED). The ticker is GMED and I have to admit, I’m very behind on this company because the reason why I’m looking at it is actually because they are going through the process of merging with a competitor, NuVasive, in a $3 billion all-stock merger. Now, this is a company whose merger was announced last month, so I am very behind here. But the deeper I get into it, the more excited I am about this combination of businesses.

The market does not appreciate it because spinal acquisitions and mergers in the past have typically not been accretive for shareholders, they’ve struggled, but these are two smaller businesses that can avoid some of the challenges that Medtronic and Johnson and Johnson have experienced in the past. I do think that Globus Medical’s focus on the minimally invasive spinal surgery combined with NuVasive’s screws and rods and other accessories specifically for spinal surgeries could be an interesting acquisition. Not to mention that if these two companies combine — which regulators are still out on that — but if these two companies combine, they make the third-largest spinal business in the world with 20% market share here in the United States.

Chris Hill: Steve, question about Globus Medical.

Steve Broido: Sure. When companies like this merge, would we be better off waiting until that merger actually goes through and everything lands and we know exactly how things are going to work out, or do we want to get in early?

Emily Flippen: Well, it usually depends on the merger and how you’re feeling about the companies, how it’s set up. In this case, this is an all-stock merger. This isn’t cash leaving Globus’ balance sheet, and that potential dilution from the acquisition of NuVasive did result in a nearly 20% decline in Globus Medical’s stock. In my opinion, with these two companies, if you look at the acquisition or the merger, and you like the end product and what it could be, there’s no reason to not buy Globus shares today.

Chris Hill: Ron Gross, what are you looking at this week?

Ron Gross: Going with Donnelley Financial Solutions (NYSE: DFIN). They provide cloud-based software that helps mostly their financial clients create and distribute financial communications. That’s quarterly reports like 10-Qs, annual reports like 10-Ks, IPO filings, mergers and acquisition filings. It’s largely been a turnaround story over the past six-ish years. They’ve invested in its software offerings, reduced headcount by 40%, shed their low-margin print contracts — it was a legacy print business — and sold some non-core assets. They used the sale of those things to retire debt, repurchase shares. Software now accounts for 41% of sales. And my friends over at our Value Hunter service think the stock has meaningful upside potential from here.

Chris Hill: Steve, question about Donnelley Financial?

Steve Broido: When you see a company like this, what’s their biggest moneymaker? What is it — is it they’re serving financial documents for companies and companies have to do this by law? What’s the big moneymaker here?

Ron Gross: Well, the fact that they have to do it by law helps with demand, and then they have a software product that fulfills that demand. Those two things together are pretty powerful and can lead to pretty significant revenue.

Chris Hill: What do you want to add to your watch list, Steve?

Steve Broido: I’m going with Emily.

Emily Flippen: Emily.

Chris Hill: Emily Flippen, Ron Gross, thanks for being here.

Ron Gross: Thanks, Chris.

Emily Flippen: Thanks.

Chris Hill: That’s going to do it for this week’s Motley Fool Money radio show. The show is mixed by Steve Broido. I’m Chris Hill. Thanks for listening. We’ll see you next time.

SVB Financial provides credit and banking services to The Motley Fool. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Chris Hill has positions in Alphabet, Apple, Block, Chewy, Johnson & Johnson, Nike, and Starbucks. Emily Flippen has positions in Block, Chewy, and Globus Medical. Ron Gross has positions in Apple, Block, Darden Restaurants, Meta Platforms, Nike, and Starbucks. Steve Broido has positions in Alphabet, Apple, Chewy, Netflix, and Starbucks. The Motley Fool has positions in and recommends Accenture Plc, Alphabet, Apple, Block, Chewy, Globus Medical, Meta Platforms, Netflix, Nike, Starbucks, Tesla, and Trupanion. The Motley Fool recommends Donnelley Financial Solutions, Johnson & Johnson, KB Home, NuVasive, Ollie’s Bargain Outlet, and SVB Financial and recommends the following options: long January 2025 $290 calls on Accenture Plc, long January 2025 $47.50 calls on Nike, long March 2023 $120 calls on Apple, short April 2023 $100 calls on Starbucks, short January 2025 $310 calls on Accenture Plc, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.