How do you hide more than $100 million? You're listening. It's Motley Fool Money. I'm Ricky Mulvey joined today by Wicked Super fan. He's got a magic wand in hand and a coffee on the desk. It's Jason Moser. Jason, how are we doing?
Hey, doing great, Ricky. How about you? I'm doing pretty well. Are you more of an Alfelba or a Galinda kind of guy? Alfelba. Alfelba. Alfelba. Come on, listen. I mean, I saw the musical on Broadway, so I've got like, you know, some really great memories there. You know, I don't know that I really play sides there. I thought the juxtaposition was very well done and the music was tremendous. It was a great experience. We took our daughters up in New York City several years back and saw it on Broadway as pretty awesome.
It's wicked week, but it's also a week for Macy's. You'd think we'd be talking about the Macy's Thanksgiving Day parade this week, but Macy's has a problem going on at the corporate office, Jason. Macy's reporting preliminary results this morning, a little weaker than the analysts were expecting, but here's the real story.
Macy's had something to say in a section titled other corporate developments. I'm going to steal that title when I have something I need to tell people. The company identified that a single employee with responsibility for small package delivery made an erriness accounting accrual
of approximately 132 to about $150 million of cumulative delivery expenses from 2021 to 2024. There was an erroneous accounting accrual of more than $100 million. What's the translation here?
that's just numbers right i mean uh... yeah i i think i'm looking at looking at this on the surface i mean i think the the the initial reaction would be well this is a visible however the thing is here in this case the the individual uh... responsible actually didn't pocket the amounts in question
So it's a very odd situation. It's really interesting to think that it kind of went undetected for as long as it did. It's strange that the auditors didn't catch it as well, but yeah, it feels like
It could have been one of those things where it was, it was like somebody forgot to carry the two or something or missed a decimal point like four or five years ago. And then it just snowballed, right? They tried to fix it and in trying to fix it, the problem got worse and worse and worse. But yeah, it's, it's, it's a lot of money for an accounting error.
That's the thing that's surprising to me is that it appears that the money was hidden, but not stolen. I thought we were on, I thought we had like an office space situation on our hands where they were taking like a percentage of a set off every transaction and pocketing the change. But here's what Macy's is saying is quote, there's no indication that the erriness accounting accrual entries had any impact.
on the company's cash management activities or vendor payments. End quote. That's where I'm confused. You misplaced a hundred million dollars, more than a hundred million dollars, but it didn't affect how anyone got paid or how the company is managing its cash.
Right. Well, and I think it's worth remembering. Number one of EMAIS is obviously a very big company. And when you look at their income statement, you can start to put that into context. So if we think about this money that was hidden, right? This was something that was in regard to small package delivery expense.
And if you look at Macy's 10k, delivery expense is not a component of merchandise margin. So rather, it's part of what companies list out is SG&A, right? Sales, general, administrative costs. And if you look at that SG&A line, that's an expense line on the income statement. They're SG&A over the last 12 months.
was $8.3 billion. So when you put that into context, it isn't really that big of a financial hit. It's noteworthy. Let's not split hairs. I mean, $150 million is a lot of money. But in the context of Macy's overall business, I do at least understand how they miss this because it's not something that's just totally in your face.
We'd normally ask like what your shareholder reaction is. We're going to do a different thought exercise. If you had to make $100 million disappear from any company, we're not stealing it. We're just hiding it. We're making it disappear. Which company would you pick and how would you do it? I have an answer as well.
Yeah, I feel like I'm going to get myself in trouble for saying this. Got to lay it. Sure. I know that's not a company, but the US government seems just really set for something like this. I mean, there's a lot. I mean, there's a lot you could do with that in regard to a company. I think I would look for a company that did a lot of transactions, probably dealt with a lot of inventory and probably mentioned shrink a lot in their earnings calls over the last couple of years.
So, geez, I'm a shareholder in a home depot, so I don't want to go too far with this. But something like that might make sense because they're so big, you could probably do this without it ever being noticed, but I'm never going that route regardless.
Well, here's the way I'll flip it is I'm thinking of what is the company that I would be least likely to steal from and get away with it. And I think of a company like Amazon where you're like, they're going to notice it. They're on it and it gives me a little bit more faith in the management team and in the company itself and how long it's going to stick around. I'll pick, even though they're dealing with a lot of inventory, I'm going to pick a company that's maybe dealing with a lot of cryptocurrency transactions.
and raising a lot of debt in order to buy a lot of Bitcoin. There's so much going on with the blockchain and so many intermediaries going on there. I think I would go with micro strategy, not that I'm ever stealing from a publicly traded company. Nope, I like that. That makes sense. That makes sense.
Let's move on to another story. There's a good article in The New York Times. I'll link it in the show notes by Thomas Weber. And it's about how the junk food industry is trying to adapt to wider spread, GLP1 drug use. And I thought there was a story in here that kind of encapsulates what's going on. They talked to Kathleen Kenney, who's a 54 year old who runs a sword fighting school.
And she told the New York Times that, quote, a ho-ho no longer seems like food. It tastes plasticky, she said, or it feels plasticky in my mouth. And what the article is getting at is how people who are taking weight loss drugs have changed relationships with process and ultra process foods, and then how the food makers are responding.
A more overall question as we start out to set the table, do you think food demand for these food manufacturers and companies like Walmart that sell it? Do you think that's going to fundamentally change over the next few years?
There's no question to me, at least, that people are starting to care more and more about the food that they eat. And I think even further more, that new generations will be raised with a different mindset for sure. I mean, I certainly already see it with our kids, for example, in their freshman and sophomore's in college now. So I absolutely think this is going to
be something that changes the way these companies determine what they want to go ahead and bring to market. It's probably going to impact a lot of those delightful snacks that we remember from our childhood days. You think of companies like PepsiCo that are making Cheetos, these types of big snacking companies are trying to respond to it. There's a separate company, it's a private company,
that does food innovation. It's called Madsen. And it's trying to develop food for GLP1 users, thinking like chicken sticks wrapped in mozzarella or like brownie bite cubes with whey protein in them. And you know, when I first read this article, I shook it off. I'm like, here are these companies flailing and trying to fight a losing battle. But then you have the flip side, Bob Nolan, who's a senior vice president at Conagra Brands,
told the writer, quote, you're probably not going to want to be in the kitchen prepping an elaborate meal just to have a few bites, end quote. I mean, I know you like to cook J-Mo, but do you think the big food manufacturers have a point here? Well, yeah, I think the word processed is becoming a bad word in food, kind of going back to the way people are thinking a little bit differently about how they eat. And I certainly fall into that category as well. And I'm more of a live to eat guy, Ricky, not an eat to live.
But I don't know that they're fighting a losing battle, but I do think it brings to question the growth actually in the industry. I think companies are just going to need to evolve and rethink how they make their food, or they absolutely will risk becoming marginalized. And then I think, finally, there's clearly going to be a marketing all
all of this. Most people probably don't spend all that much time researching so in depth what they're eating, they will kind of take things at face value. So I'll be interested to see how the marketing campaigns for this at large sort of take shape over the next decade and beyond.
Living to eat a little bit of a better existence than the alternative JMO. I think this trend and the reason I want to talk about it is because I really do think this is going to be one of the biggest economic trends over, if not the next few years, over the next decade or so, which is the impact of these weight loss drugs. I've got a little bit of Eli Lilly stock just to be invested a little bit.
And Morgan Stanley points out that while 7 million Americans are taking these drugs right now, by 2035, that could expand to 24 million people. So going from 7 to 24, more than tripling it. And that number would more than double the number of vegetarians and vegans in America. Still room to grow by 2035 if they get there to that 24 million mark. But is this weight loss drug trend? Is this something that you're directly investing in or watching?
It's a little bit questionable at least. There's always a pill for that, right? But in this case, there is a lot that we still don't know in regard to the longer term implications of these GLP drugs. So that will be information that comes out in the course of the next five, 10 years and beyond. And hopefully that is good news. I mean, I can't say whether it will be or not. But I think
Owning healthcare companies is always something worth considering, I think, for investors. I mean, I guess if you... I still own shares in Teladoc Health, for example. I mean, I've owned those ever since the IPO.
given the Lavongo acquisition and everything that they're doing to try to address sort of chronic conditions and whatnot. I mean, I guess I am invested in a way in a company that will at least be trying to address this to some extent. But they're clearly approaching it from a different angle, right? They're approaching it more from an angle of healthy lifestyle and in keeping track of what you're doing as opposed to just always having a pill to take care of that for you.
To run us out, there's a story in Bloomberg about West Texas energy in this company called the Texas Pacific Land Corporation. There's an AI angle we're getting to here, Jason, but have you heard of this? I heard one person mention it to me about a month ago, but have you heard about this company before this morning?
I absolutely had heard of it. I didn't know anything about it. It's just not a company in a space that I really follow closely, but I had heard of it before. There's a lot of investor hype around it because this company owns 873,000 acres in West Texas for the context of that. That's about the size of Rhode Island that this company just owns the oil rights to.
In West Texas, the stock is up more than 200% this year as investors are hoping that big tech companies will build data centers in this kind of area where natural gas is cheap. And what's changed is not just like the money that they've made from these data centers being built, but valuation and investor expectations, where this company went from about 40 times free cash flow or earlier this year to more than 100 times.
But when you think about these investors getting really excited for these literal picks and shovels plays, do you think the hope in hype here is warranted?
I mean, I certainly understand the hype. I mean, there are a lot of conversations out there in regards to data centers and the opportunity there. We know that data centers are going up in a very rapid pace. If you look at McKinsey research, for example, they're looking at current trends global demand for data center capacity should rise annually around 20% from 2023 to 2030.
That is a pretty long stretch of sustained growth there. You go through an NVIDIA earnings call. Obviously, they talk a lot about data centers. That's the bread and butter of their business really. I definitely get the enthusiasm, but I think you make a very good point. That enthusiasm, however warranted it may be, valuation does always matter. There's a lot of enthusiasm in some of these AI names today.
And this is a business that is also fundamentally sound. There's a real business there that has an extraordinary advantage and that I was watching scoreboard earlier on the Motley Fool Live premium feed. And I think it was Tyler Crow pointing out that these 870,000 acres have a carrying value of just $100 million or $95 million. So there's a tremendous amount of value here and a lot of people are going to want to get to that oil and this company is able to collect the royalties of it.
But there is a lot of excitement. And what would your advice to investors who are looking for these picks and shovels plays in AIB?
Well, I think just make sure you can connect the dots, right? Understand how this individual company is ultimately benefiting from the trend. Don't just go by what the headlines tell you. Like I mentioned, valuation always matters and a lot of enthusiasm and the headlines tends to push interest in buying and therefore, evaluations up. You mentioned it, fundamentals, I think, making sure these companies have fundamentals in place. Good financials, a business model that makes sense, strong leadership that knows what they're doing.
Those are some key things to focus on if you want to do a pursuit of this trend. And Jason, if you end up going to Wicked this afternoon, that's three hours. If we're including previous where you got to get your butt in that seat for three hours, so I want to be very mindful of your time as we let you go here. I appreciate that. Thanks for joining us. I'm not the full mic. Thank you.
Alright up next, Bloomberg's Lucas Shaw joins me to chat about Netflix and the company's pivot to live events. Lucas also writes the informative and entertaining screen time newsletter. I recommend you check it out.
the popular science show with millions of YouTube subscribers comes the MinuteEarth podcast. Every episode of the show dives deep into a science question you might not even know you had, but once you hear the answer, you'll want to share it with everyone you know. Why do rivers curve? Why did the T-Rex have such tiny arms? And why do so many more kids need glasses now than they used to? Spoiler alert, it isn't screen time.
Our team of scientists digs into the research and breaks it down into a short, entertaining explanation jam-packed with science facts and terrible puns. Subscribe to MinuteEarth wherever you'd like to listen. Netflix spends $17 billion on content a year, and that's actually up from last year, I think it was $13 billion. Is there looking at these big live events? Do you think there's a trade-off from other programming, or is the pie just getting bigger for Netflix here?
It's definitely a tradeoff, because actually a 17 billion figure has been pretty steady for probably two or three years now. And the money for live comes out of the larger unscripted budget, because it all folds up under this executive brand in Rheeg. And so if he spends half a billion dollars or a billion dollars on live programming, that's money he can't spend elsewhere unscripted. Now, for now, the amount of money they're spending on live is small enough.
that I think the total unscripted budget has probably grown because of how much they're doing there, but he could also reduce in some places. I noticed that I believe their CFO made some comments in the last call suggesting that they would increase their programming budget in the future. And so I think if they do more live, the total programming budget will grow. But for now, yeah, it comes from other parts.
So I would imagine that if you're for Netflix executives, not that they're making these direct trade offs, they may be thinking, uh, maybe it was better to pay Mike Tyson and, and Jake Paul, a collective 60 million for, for 15 minutes of work versus getting the Russo brothers to make another original action movie. But for this, the unscripted stuff is this, is this reality shows? Is this documentaries? What is, what's, what's the pie being taken from there?
Yeah, I mean Netflix's unscripted division includes documentary series. It includes dating programs like Love is Blind. It includes music competition programs. Netflix at this point releases dozens of unscripted programs every year. It's been one of their more successful kind of new quote unquote programming areas.
I want to talk a little bit about the movie side where there's another strategic shift you've reported on this. Originally, there was this sort of spray and pray strategy where they were releasing as many movies as they possibly could. You rightly point out that Netflix doesn't make a lot of good movies. There's been a few exceptions to the rule. I liked the Irishman and Roma got a best picture nod.
You know, from an outsider perspective, I would expect like, hey, if you just give filmmakers a blank, blank checks and make a bunch of stuff, there's going to be a lot of good stuff that rises to the top. Why didn't that work out for Netflix as much? You're asking why I don't think they have made more good movies?
Yeah, if you're just giving a director $5 million and you let them go do whatever they want, I would expect that to create some sort of cult classic or A24-esque type successes where you get a lot of people or cult followings for more movies versus just TV in the background. Part of it is they're just doing too much. It's very hard to have any kind of quality control when you're making
More than one movie a week or releasing more than one movie a week I should say also people underestimate or don't appreciate that feedback from other people makes your work better so.
getting notes from a studio or getting some guidance from a producer and all these things that a lot of filmmakers weren't getting at Netflix can help the product. And Netflix films suffered because they were trying to do too much and as a result, couldn't give that kind of feedback or didn't want to or whatever it may have been. Netflix also just puts out so many movies so quickly that they feel pretty disposable. So they might not even have that chance to become a cult classic. It's possible that
Five, seven years from now, maybe people will rediscover some of these movies and decide that they really like them. But in the moment, I just think it was too much. And in the case of where they worked with a lot of talented filmmakers, like, they were.
giving those people sort of too much money to make a not fully developed idea. So it wasn't like you had some filmmaker who'd spent years trying to get this thing made and just like couldn't get the money and did. Oftentimes it's like, oh, Alfonso Crone, you want to make this personal story? Here's like more money than you need to go do it. And now Romo is an example of a good movie that they made, but it was a lot of that.
On Netflix's film strategy, along with Thomas Buckley, you reported that now they're talking to IMAX to get Greta Gerwig's Narnia on very large screens. Do you really think this is a one-off like Netflix leadership would tell you, or are we seeing a change in strategy here?
for now i believe it is if not a one off it i don't believe it is a sign of a strategy change you know if you go back to the earliest days of netflix's film strategy they actually tried this with one or two of their early movies i forget if i was crouching tiger something like that they put on ivex screens because the major theater chains wouldn't play their movie.
And so I think they're doing what they have to do to satisfy Greta Gerwig. Greta is, she's attached to the project. She wants to make it. It doesn't seem like she's trying to get out of it, but she does want it to be on theaters. And because it's going to be this big movie, it makes a lot of sense for people to see it on those types of screens. I think Netflix is probably able to say, you know,
grad is a unique filmmaker and we're doing what we need to do to make her happy, but you know, we're not going to do this with everyone. Also, keep in mind that that movie hasn't even entered production. So it's not coming out for two years at a minimum. So I don't think you're going to see between now and then like suddenly a bunch of filmmakers get to put their movies and theaters, whoever they want. So no, I haven't gotten any sense from the folks at Netflix that their strategy
Because changing in any material way, I think they have a track record of tweaking what they're doing to appease filmmakers. And this is another example of it. That's not to say strategy won't change. There are all sorts of things Netflix have said that they don't want to do. And then they end up doing for one reason or another. But I don't think we're there with the film business yet. Because at the same time that this was going, they lost out on another project involving Margot Robbie at large part because they didn't want to put it in theaters.
So was this, it was this the, um, it was like a nice project. Wuthering Heights. Okay. The other thing that Netflix has changed on was, was ads and for a while the ad business was just getting started. And I've heard on the town with Matt Bellany, I believe it was you who said that it 40 million basically ad members. It's not super scalable.
Right. What about 60 million? When does this get scalable? Because now Netflix is at 60 million. At what point do the ads at 70? Excuse me. At what point is the ad business really impactful for Netflix, you think? We're getting a little closer. You know, the tricky part with it is so that 70 million figure it's viewers. So they're counting people who maybe use an account like multiple people per account. It also means that
if people watch something like the NFL game will have advertising, right? They'll be able to count those people as MAUs because they watched it one day of the month. But come January, they won't count because they're not on the ad tier. So I'll be curious how that number changes, but they're getting there. They're slowly but surely getting the scale is spread across 12 countries. I don't think they're big enough in any market for them to really matter.
In terms of advertising, they say now I think that next year, year after, is when people will start to see it be a meaningful contributor. As they add more live programming, as more people sign up for the ad tier, as they direct more people to it, they'll get to a point where their ad business will be meaningful. I don't think it'll be meaningful compared to YouTube. I don't know how long YouTube subscription business is much larger than Netflix's advertising business.
But I think in the next two, three years, we'll start to see if it'd be big enough that they'll make enough money that Wall Street will be paying attention. Netflix can't do probably what was Amazon Prime, where suddenly everybody gets ads for what they're watching. Another strategic shift that's come out of Netflix lately is with gaming. They closed a gaming studio, and this is something I've always been a bit confused about. What was Netflix hoping for with its gaming efforts, or what is it hoping for?
Well, I think Netflix, like all of these Hollywood companies, sees gaming as this very large entertainment business that is related to film and television, right? It's also storytelling. Some of the biggest properties are based on film and TV properties. Some of the biggest movies and TV shows are now based on gaming. There's sort of a logical interchange and a lot of entertainment companies have tried and largely failed at gaming. Much as a lot of gaming studios have tried and largely failed at
making film a television. And so I think Netflix was looking at this as if they wanted to plan for 20 years in the future, they needed to do something in gaming and that they wanted to have it be more than just licensing their titles to other people. They wanted to make their own games and use their platform, which has hundreds of millions of people using it every month.
as a way to get people to play those games. If it weren't for certain app store rules, I'm sure they'd love it to enable people to play the games within Netflix instead of need to go to a separate app. And so they slowly built up this team to develop a bunch of in-house games, some of it for based on Netflix properties and some of which weren't. And I think they quickly realized that making games is a lot harder than most people realize, or most people think it will be, I should say.
And so they've changed strategies a couple of times. They moved ahead of gaming over to another part of the company. They seem to go back and forth about, are we making mobile games? Are we making games for consoles? Are we making games for PC? Are we making small games, big games? The studio that they closed made bigger games. So it seems like maybe they're less interested in that. They could have a slightly less
ambitious strategy. They've also been pretty clear that the games based on their titles generally do better than the ones that are not, which makes a lot of sense. I think Netflix's gaming efforts remain sort of one of the big questions at that company and more broadly across media.
And then last question as we wrap up, this is something I don't understand in the industry, really at all. Over the pandemic, these release windows for movies completely collapsed. Netflix, as we mentioned famously, does not like putting movies in theaters that much. But for these other entertainment companies, they tried doing movies directly onto streaming and then realized they kind of needed theaters. But the thing that's remained surprising to me is just how quickly movies go from theaters to video on demand to streaming.
Why have those release windows stayed so tight? Why haven't they expanded? Well, they have expanded. It's funny if you look back on it. Before the pandemic, these studios and theaters spent years arguing over it and they didn't really change. And then the pandemic scrambled at all. In some cases, the windows collapsed to zero, right? They've since expanded back out where
For most movies, there's at least a few weeks and usually a few months before it's available for rental or transaction at home, and then another couple months before it's available to stream. Every company's a little different. Setting aside, Netflix. Universal has the most aggressive strategy where you can buy those movies at home oftentimes, like 17 days after they're in theaters while they're still in theaters.
and then they'll go to peacock usually after like three months. But I just had a conversation with the head of Paramount Pictures who said, we've slowly walked it back where now usually their movies aren't available at home for two months, three months, four months, because they feel like that's better. And so we're still finding that happy medium where you can sort of take advantage of the marketing that you do when a movie comes out on streaming, not need to do a whole secondary campaign.
And some people believe that making a title available at home, depending on how it's available, it doesn't necessarily cannibalize the theatrical performance. Universal would point to the wild robot. This kid's movie that has held up really well in theaters, even though it's available at home. Lucas Shaw, appreciate your time and your insight. Thanks for joining us on Motley for Money. Thanks for having me.
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, to sell anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that would personally recommend to friends like you. I'm Ricky Mulvey, thanks for listening. We'll be back tomorrow.
