1 00:00:00,040 --> 00:00:01,880 Welcome back, everyone. Today on the Joseph Carlson 2 00:00:01,880 --> 00:00:03,440 Show. I've had a bad case of 3 00:00:03,440 --> 00:00:06,200 laryngitis over the weekend. My voice has been completely 4 00:00:06,200 --> 00:00:07,360 gone. I've been getting it back a 5 00:00:07,360 --> 00:00:09,800 little bit more every day, but I have so many things that I want 6 00:00:09,800 --> 00:00:11,680 to share. So I apologize if I sound a bit 7 00:00:11,680 --> 00:00:12,640 off. Bear with me. 8 00:00:12,760 --> 00:00:15,080 However, we have a lot of news to get to on this episode. 9 00:00:15,160 --> 00:00:18,280 First of all, the Big Short investor Steve Eisman believes 10 00:00:18,280 --> 00:00:20,400 that Apple is the hidden AI play. 11 00:00:20,520 --> 00:00:23,120 We'll be looking at the case he makes for Apple being an AI 12 00:00:23,120 --> 00:00:24,960 play. Now, we also have one of my core 13 00:00:24,960 --> 00:00:28,880 holdings into it trading down today and yesterday into it. 14 00:00:28,880 --> 00:00:32,360 Reported earnings here and it traded down 8% after earnings. 15 00:00:32,520 --> 00:00:35,160 It's down 10% on the week. We'll be looking at what went 16 00:00:35,160 --> 00:00:38,320 wrong and what I plan to do with my Intuit shares because I still 17 00:00:38,320 --> 00:00:40,800 currently own $56,000 worth of Intuit. 18 00:00:40,840 --> 00:00:43,080 And then finally, we have the casual restaurant chain Red 19 00:00:43,080 --> 00:00:45,640 Lobster filing for bankruptcy. We'll be looking at whether or 20 00:00:45,640 --> 00:00:48,160 not the endless shrimp deal really caused the bankruptcy of 21 00:00:48,160 --> 00:00:50,800 Red Lobster and what Red Lobsters bankruptcy means for 22 00:00:50,800 --> 00:00:53,920 other restaurants like one I happened to own called Texas 23 00:00:53,920 --> 00:00:55,480 Roadhouse. We have all of this to go 24 00:00:55,480 --> 00:00:58,120 through plus much more on this episode, so we have a lot to 25 00:00:58,120 --> 00:00:59,800 cover. Let's 1st jump into Apple. 26 00:01:00,040 --> 00:01:02,640 Apple's been one of my longest core holdings in this portfolio. 27 00:01:02,640 --> 00:01:06,600 Currently a $42,000 position, and I'm $25,000 in the green. 28 00:01:06,680 --> 00:01:08,960 But Apple is struggling now with the number of pressures. 29 00:01:08,960 --> 00:01:10,520 First of all, the valuation is higher. 30 00:01:10,600 --> 00:01:13,480 It now trades near a 34 PE ratio, which is a bit higher 31 00:01:13,480 --> 00:01:15,840 than its historical average. The revenue has only grown 32 00:01:15,840 --> 00:01:19,440 around 2% over the past three years, and Apple now faces a lot 33 00:01:19,440 --> 00:01:20,960 of regulatory challenges as well. 34 00:01:21,000 --> 00:01:22,920 So I've been a bit more cautious on Apple. 35 00:01:22,920 --> 00:01:25,160 I've trimmed my position a little bit, but I still hold a 36 00:01:25,160 --> 00:01:28,320 relatively large position. Now despite those concerns, one 37 00:01:28,320 --> 00:01:31,280 of my most respected investors, which is Steve Eisman, he's one 38 00:01:31,280 --> 00:01:34,120 of the big short investors and I believe he gives very level 39 00:01:34,120 --> 00:01:37,000 headed advice. He was asked about AI and which 40 00:01:37,000 --> 00:01:39,640 companies he thinks will benefit the most from artificial 41 00:01:39,640 --> 00:01:41,320 intelligence. You think that there's a huge I? 42 00:01:41,360 --> 00:01:43,440 Think Apple's actually the hidden AI play. 43 00:01:44,520 --> 00:01:48,880 Not exactly today, but will be because, you know, everybody's 44 00:01:48,880 --> 00:01:51,400 focused on the chips and everybody's focused on the 45 00:01:51,400 --> 00:01:53,840 cloud. But at the end of the day, when 46 00:01:53,840 --> 00:01:57,000 there will be apps, and I have no idea when that's going to be, 47 00:01:57,000 --> 00:01:59,160 but when there will be apps that the consumer can use, they're 48 00:01:59,160 --> 00:02:00,480 going to want to use it on their phone. 49 00:02:01,120 --> 00:02:04,560 And I have a new iPhone and I know for sure that when all 50 00:02:04,560 --> 00:02:07,160 those apps come on, my phone is going to I'll need a new phone 51 00:02:07,160 --> 00:02:10,320 and I'll need a new iPad and I'll need a new laptop. 52 00:02:10,639 --> 00:02:14,760 And so when the apps show up, the biggest probably beneficiary 53 00:02:14,760 --> 00:02:17,200 is going to be Apple because they're going to have a refresh 54 00:02:17,480 --> 00:02:18,880 of every literally everything that they. 55 00:02:18,880 --> 00:02:22,480 Sell His first major thesis on Apple being an AI play is that 56 00:02:22,640 --> 00:02:24,880 AI will eventually go through the phone. 57 00:02:25,000 --> 00:02:27,280 When it goes through the phone, it'll have to pass through the 58 00:02:27,280 --> 00:02:29,440 Apple tollbooth. And the Apple tollbooth is the 59 00:02:29,440 --> 00:02:31,800 service line of revenue, the only consistently growing 60 00:02:31,800 --> 00:02:33,680 revenue from Apple. Now, of course, that could be 61 00:02:33,680 --> 00:02:36,360 the case for consumers using AI applications. 62 00:02:36,560 --> 00:02:39,920 Anytime you run a digital transaction, Apple take a cut 63 00:02:39,920 --> 00:02:42,200 from that digital transaction. He's also asked about the 64 00:02:42,200 --> 00:02:45,200 concerns of Microsoft taking market share from Apple by 65 00:02:45,200 --> 00:02:47,760 offering AI hardware. You know, trade happened with 66 00:02:47,760 --> 00:02:51,440 Microsoft, which just unveiled its new sort of hardware lineup 67 00:02:51,440 --> 00:02:55,240 that is AI I equipped. Partially, I mean, that's going 68 00:02:55,240 --> 00:02:56,640 to happen. But yeah, I don't know how much 69 00:02:56,920 --> 00:02:58,800 Apple. I mean, you're going to need to 70 00:02:58,800 --> 00:03:01,200 see people start to buy their laptops and it's going to be 71 00:03:01,320 --> 00:03:03,960 more than you probably need more than just Microsoft doing what 72 00:03:03,960 --> 00:03:06,720 it's doing. The apps have not come yet when 73 00:03:06,720 --> 00:03:10,000 they will, and I have no idea when that's when this whole 74 00:03:10,000 --> 00:03:11,680 refresh cycle is really going to take off. 75 00:03:11,760 --> 00:03:14,440 Satya Nadella has been talking about these new Microsoft 76 00:03:14,440 --> 00:03:18,040 laptops and that's great. But it is true he needs to 77 00:03:18,040 --> 00:03:20,080 actually see them sell. I don't think they'll take any 78 00:03:20,080 --> 00:03:22,360 market share from Apple. And laptops are not the most 79 00:03:22,360 --> 00:03:24,120 important category with applications. 80 00:03:24,120 --> 00:03:26,440 Phones are now moving on. With this interview, he's asked 81 00:03:26,440 --> 00:03:29,560 about NVIDIA, which is the go to AI play today. 82 00:03:29,680 --> 00:03:32,680 NVIDIA trades up in price every day as investors become 83 00:03:32,680 --> 00:03:34,960 increasingly bullish on its future prospects. 84 00:03:34,960 --> 00:03:37,600 But Steve Eisman double S down again on why he believes Apple 85 00:03:37,600 --> 00:03:39,720 is actually a less obvious AI winner. 86 00:03:39,840 --> 00:03:45,200 Right now, the easiest way to play AIR is NVIDIA, AMD, few 87 00:03:45,240 --> 00:03:49,520 other chip players, and then anybody who is in the cloud with 88 00:03:49,520 --> 00:03:53,000 a massive database. Beyond that, either there's 89 00:03:53,000 --> 00:03:56,120 Apple, which I just mentioned. And after that it's not clear 90 00:03:56,120 --> 00:03:59,600 because so much of what's going to happen is unknown. 91 00:03:59,720 --> 00:04:02,120 I you know, there's no, there's no way to know at this point. 92 00:04:02,240 --> 00:04:05,560 So Steve focuses on the fact that Apple owns the App Store, 93 00:04:05,600 --> 00:04:07,960 and having new AI apps in the App Store will cause a big 94 00:04:07,960 --> 00:04:09,400 refresh. Now, there's another way that 95 00:04:09,400 --> 00:04:11,880 Apple wins that Steve Eisman didn't even mention here. 96 00:04:12,000 --> 00:04:14,400 We're seeing a lot of devices enter the market that are 97 00:04:14,400 --> 00:04:18,320 different factors of AI devices, like the humane PIN. 98 00:04:18,600 --> 00:04:21,000 It does projections, it talks back and forth to you. 99 00:04:21,240 --> 00:04:22,960 It does a lot of different neat things. 100 00:04:23,240 --> 00:04:25,520 And this has received a ton of funding. 101 00:04:25,520 --> 00:04:27,400 This is a really well funded device. 102 00:04:27,400 --> 00:04:30,600 They're going after the iPhone market, but the reviews for this 103 00:04:30,600 --> 00:04:34,120 PIN have been not so good, with top reviewers saying it's one of 104 00:04:34,120 --> 00:04:35,520 the worst devices they've reviewed. 105 00:04:35,680 --> 00:04:39,440 Ultimately, what this humane pin boils down to is a nice pin 106 00:04:39,600 --> 00:04:44,440 attached to ChatGPT. That's all it is, a ChatGPT pin. 107 00:04:44,520 --> 00:04:47,600 Another new device that came out recently is this Rabbit R1 108 00:04:47,600 --> 00:04:49,800 device. It looks a little old school as 109 00:04:49,800 --> 00:04:51,400 a screen here that you can scroll through. 110 00:04:51,800 --> 00:04:55,680 And basically when you summarize this device, it's another 111 00:04:55,680 --> 00:04:58,400 plastic device attached to ChatGPT. 112 00:04:58,400 --> 00:05:01,560 The biggest criticism that people had for this device was 113 00:05:01,560 --> 00:05:04,520 the form factor. If you made some changes like 114 00:05:04,520 --> 00:05:06,560 they're illustrating here, you could improve it. 115 00:05:07,040 --> 00:05:10,600 You could widen the screen, make it touch screen, make it so it 116 00:05:10,600 --> 00:05:14,160 has little buttons on the side, lengthen the screen so it's a 117 00:05:14,160 --> 00:05:16,280 little bit taller and you have more room, and then you 118 00:05:16,280 --> 00:05:19,120 basically have a phone. All these third party devices 119 00:05:19,120 --> 00:05:24,160 are trying to go around Apple by simply integrating ChatGPT into 120 00:05:24,160 --> 00:05:27,160 their plastic box, and that strategy is not working because 121 00:05:27,160 --> 00:05:29,160 the phone is already so powerful. 122 00:05:29,160 --> 00:05:32,360 Now Apple knows that they can make all of these other devices 123 00:05:32,360 --> 00:05:35,240 completely irrelevant by integrating right into the 124 00:05:35,240 --> 00:05:37,720 source. Having the iPhone integrate with 125 00:05:37,720 --> 00:05:41,360 ChatGPT directly, that would take all of advantages away from 126 00:05:41,360 --> 00:05:45,840 the humane PIN or the Rabbit R1 or any other third party device 127 00:05:45,840 --> 00:05:48,160 that's trying to use AI as an advantage. 128 00:05:48,240 --> 00:05:52,000 Apple's entire ecosystem would become an AI ecosystem. 129 00:05:52,000 --> 00:05:54,600 So when we look back to Steve's comments, I think there's two 130 00:05:54,600 --> 00:05:56,960 ways that Apple become a hidden AI play. 131 00:05:56,960 --> 00:05:59,680 One of them is with the apps like he mentioned, that will be 132 00:05:59,680 --> 00:06:02,280 in the App Store. That could cause a new refresh 133 00:06:02,280 --> 00:06:05,120 cycle with Apple devices better suited to run AI. 134 00:06:05,120 --> 00:06:09,000 And the next one is Apple directly integrating AI into 135 00:06:09,000 --> 00:06:11,680 their phones with a ChatGPT partnership. 136 00:06:11,720 --> 00:06:14,360 If they do that and they have the type of personal assistance 137 00:06:14,360 --> 00:06:17,240 that ChatGPT showed off, that could be a game changer. 138 00:06:17,280 --> 00:06:19,720 So we'll have to see ultimately what Apple decides to do, but 139 00:06:19,720 --> 00:06:21,040 there are some growth paths there. 140 00:06:21,080 --> 00:06:22,840 Now, moving on from Apple, we had another company in My 141 00:06:22,840 --> 00:06:24,920 Portfolio recently report earnings. 142 00:06:25,000 --> 00:06:28,560 The company was into it. This is a large $56,000 143 00:06:28,560 --> 00:06:30,840 position. I'm currently $15,000 in the 144 00:06:30,840 --> 00:06:35,000 green, and that is after the company has traded down 10% over 145 00:06:35,000 --> 00:06:37,320 the past week. It dropped down 8% after 146 00:06:37,320 --> 00:06:39,160 reporting earnings in their earnings report. 147 00:06:39,160 --> 00:06:41,520 As investors scan over the different highlights, there's 148 00:06:41,520 --> 00:06:43,960 one line that caused investors some concerns. 149 00:06:44,160 --> 00:06:47,920 Customers paying nothing to be over 10 million, down from 150 00:06:47,960 --> 00:06:51,120 11,000,000 last year. That is the headline there. 151 00:06:51,360 --> 00:06:55,200 The Intuit is losing market share from its free TurboTax 152 00:06:55,200 --> 00:06:57,840 customer. Now, to add context to this, the 153 00:06:57,840 --> 00:06:59,920 CEO is not worried about this at all. 154 00:06:59,920 --> 00:07:01,360 It's actually part of their plan. 155 00:07:01,680 --> 00:07:05,640 They're not focusing on TurboTax free customers, they're focusing 156 00:07:05,640 --> 00:07:08,920 on converting those customers into paid customers, which they 157 00:07:08,920 --> 00:07:12,360 did successfully. TurboTax Live Revenue, which is 158 00:07:12,360 --> 00:07:18,080 a paid version of TurboTax, grew 17% to 1.4 billion, representing 159 00:07:18,080 --> 00:07:21,080 approximately 30% of the total consumer group revenue. 160 00:07:21,160 --> 00:07:24,280 They want to get this from 30% up to 70%. 161 00:07:24,400 --> 00:07:27,400 Their long term goal is not to have as many free customers as 162 00:07:27,400 --> 00:07:29,600 possible. Their long term goal is to 163 00:07:29,600 --> 00:07:32,400 expand in the TurboTax live market. 164 00:07:32,560 --> 00:07:35,160 The live market are the people that need assistance in more 165 00:07:35,160 --> 00:07:38,440 complex tax returns and the total addressable market in that 166 00:07:38,440 --> 00:07:40,880 category of live returns is much larger. 167 00:07:40,880 --> 00:07:43,320 But overall that is the one reason the stock is down. 168 00:07:43,600 --> 00:07:45,880 Everything else on their earnings report looks good. 169 00:07:46,120 --> 00:07:48,600 They beat on their revenue, they beat on their earnings, they 170 00:07:48,600 --> 00:07:51,480 raise their full year guidance. The company's growing in every 171 00:07:51,480 --> 00:07:53,680 business segment. If we use Qualtrum Hair, we can 172 00:07:53,680 --> 00:07:56,640 look at the KPI's of the different segments of revenue 173 00:07:56,920 --> 00:07:59,160 and every single part of them is growing. 174 00:07:59,400 --> 00:08:02,360 Small business is growing, Consumer Pro Tax and Credit 175 00:08:02,360 --> 00:08:05,200 Karma, all of the revenue in every part of their company's 176 00:08:05,200 --> 00:08:07,200 growing. They have a lot of optionality 177 00:08:07,200 --> 00:08:10,080 to continue growing all these various segments and a greater 178 00:08:10,080 --> 00:08:12,520 portion of their sales is now coming from services than 179 00:08:12,520 --> 00:08:15,920 products as they continue to get people on subscription services 180 00:08:16,160 --> 00:08:19,360 away from one time sales. Intuit's stock price may be 181 00:08:19,360 --> 00:08:22,080 selling down, but from everything I could gather on 182 00:08:22,080 --> 00:08:25,160 this earnings report, it was a very solid earnings report 183 00:08:25,160 --> 00:08:27,920 across the board. Not only is the total revenue 184 00:08:27,960 --> 00:08:31,920 and the revenue by every segment growing incrementally year over 185 00:08:31,920 --> 00:08:34,520 year over year, but the profits of the company are growing. 186 00:08:34,559 --> 00:08:38,200 Intuit's free cash flow is also a record high last quarter of 187 00:08:38,200 --> 00:08:42,000 $3.89 billion higher than the year prior and higher than the 188 00:08:42,000 --> 00:08:44,159 year prior than that and the year prior than that. 189 00:08:44,280 --> 00:08:47,320 They're growing their free cash flow above 10% per year. 190 00:08:47,320 --> 00:08:49,920 This also translates well into net income for the company. 191 00:08:50,080 --> 00:08:52,560 It translates into earnings per share growth for the company. 192 00:08:52,560 --> 00:08:56,040 Their balance sheet now has more cash and less debt than quarters 193 00:08:56,040 --> 00:08:57,840 prior. And of course, they return cash 194 00:08:57,840 --> 00:09:00,440 through dividends, which they grow around 15% per year. 195 00:09:00,560 --> 00:09:04,040 Overall, financially, this was a very solid quarter from Intuit 196 00:09:04,040 --> 00:09:06,360 and the CEO highlighted that in an interview. 197 00:09:06,400 --> 00:09:08,600 We are raising our guidance for the year. 198 00:09:09,000 --> 00:09:13,840 We're shifting from 11 to 12% revenue guidance to 13%. 199 00:09:14,120 --> 00:09:19,000 And we're raising every metric, operating income and EPS, and 200 00:09:19,000 --> 00:09:21,240 it's really several fold. One, our revenue's growing 201 00:09:21,240 --> 00:09:25,520 faster and we're continuing to get just incredible leverage 202 00:09:25,520 --> 00:09:28,080 because we're a platform company and all of our investments that 203 00:09:28,080 --> 00:09:32,960 we've particularly made in data and AI is allowing us to deliver 204 00:09:32,960 --> 00:09:35,320 more innovation for our customers and be far more 205 00:09:35,320 --> 00:09:38,080 effective internally. And so that's the leverage that 206 00:09:38,080 --> 00:09:41,640 you're seeing and why we're able to, you know, increase our 207 00:09:41,640 --> 00:09:44,200 guidance across all of those metrics. 208 00:09:44,360 --> 00:09:47,240 Intuit's another company that I think is a hidden AI play. 209 00:09:47,480 --> 00:09:49,600 They're wrapping all of their products with artificial 210 00:09:49,600 --> 00:09:51,400 intelligence. They're not going to be a main 211 00:09:51,400 --> 00:09:54,240 driver of AI, but they're leveraging it for everything 212 00:09:54,240 --> 00:09:56,800 they do. With Intuit trading down 10% 213 00:09:56,800 --> 00:09:59,960 after this earnings, it is causing some concerns for other 214 00:09:59,960 --> 00:10:02,520 companies reporting earnings like Salesforce. 215 00:10:02,680 --> 00:10:05,320 Ever since Intuit reported earnings, Salesforce has had 216 00:10:05,320 --> 00:10:09,560 continuous red days as investors have looked at both Intuit and 217 00:10:09,560 --> 00:10:12,520 ServiceNow, another company that's similar it's reported 218 00:10:12,520 --> 00:10:15,600 earnings and both of them have done poorly after earnings. 219 00:10:15,880 --> 00:10:19,640 Intuit was down 10%. ServiceNow was down 20% after 220 00:10:19,640 --> 00:10:21,640 earnings. So is Salesforce reporting their 221 00:10:21,640 --> 00:10:24,560 earnings the end of this month? A lot of investors are concerned 222 00:10:24,560 --> 00:10:27,120 about this company selling off after earnings as well. 223 00:10:27,120 --> 00:10:29,880 As for me, I am holding my entire Intuit position. 224 00:10:29,880 --> 00:10:32,320 I'm not selling a share. And I'll also happily buy 225 00:10:32,320 --> 00:10:35,040 Salesforce if this company sells off after earnings. 226 00:10:35,160 --> 00:10:38,160 Both Intuit and Salesforce are highly profitable tech 227 00:10:38,160 --> 00:10:40,040 companies. They're both incredibly strong, 228 00:10:40,320 --> 00:10:43,360 and I didn't see any fundamental weaknesses in this report from 229 00:10:43,360 --> 00:10:44,720 Intuit. Now, finally, we get to the 230 00:10:44,720 --> 00:10:47,440 story of Red Lobsters Chapter 11 bankruptcy. 231 00:10:47,520 --> 00:10:50,800 And ultimately, this is a story of a restaurant being managed by 232 00:10:50,800 --> 00:10:53,720 a group of investors that don't know how to manage a restaurant. 233 00:10:53,760 --> 00:10:57,800 Let's first go to the mistake #1 the Red Lobster endless shrimp 234 00:10:57,880 --> 00:11:00,080 loss leader. It's normal for companies to 235 00:11:00,080 --> 00:11:02,440 have loss leaders. There are things that get you in 236 00:11:02,440 --> 00:11:05,720 the store that you get a great deal on so that you spend a 237 00:11:05,720 --> 00:11:08,000 greater amount of money on something else. 238 00:11:08,040 --> 00:11:10,600 For example, Costco has the hot dog and drink combo. 239 00:11:11,080 --> 00:11:13,680 Costco doesn't lose a lot of money with the hot dog and drink 240 00:11:13,680 --> 00:11:15,840 combo. But Costco also doesn't make any 241 00:11:15,840 --> 00:11:17,720 money with the hot dog and drink combo. 242 00:11:17,960 --> 00:11:21,640 The only reason they offer it is to get you to go to Costco. 243 00:11:21,720 --> 00:11:24,280 They know once you get in the store, you might be tempted to 244 00:11:24,280 --> 00:11:27,680 buy one of those big screen TV's or one of the new BBQ grills 245 00:11:27,680 --> 00:11:28,960 that they put out for the summer. 246 00:11:29,000 --> 00:11:31,240 They know they'll probably get you to buy something more 247 00:11:31,240 --> 00:11:33,920 expensive by getting you in the warehouse. 248 00:11:34,160 --> 00:11:37,520 So this is an example of a well executed loss leader. 249 00:11:38,000 --> 00:11:40,720 They have a small ticket item that they don't lose a lot of 250 00:11:40,720 --> 00:11:43,120 money on to get you to buy bigger ticket items that they 251 00:11:43,120 --> 00:11:45,640 make a lot of money on. The managers at Red Lobster 252 00:11:45,640 --> 00:11:48,680 wanted the same thing, but rather than having a loss leader 253 00:11:48,680 --> 00:11:51,560 that was inexpensive, they went with a loss leader that was 254 00:11:51,560 --> 00:11:55,280 incredibly expensive. They launched a $20 all you can 255 00:11:55,280 --> 00:11:58,280 eat shrimp deal. This allowed dining customers to 256 00:11:58,280 --> 00:12:02,440 scarf down unlimited garlic shrimp scampi or shrimp linguine 257 00:12:02,440 --> 00:12:04,760 Alfredo. The new investor that owns Red 258 00:12:04,760 --> 00:12:08,240 Lobster that came up with this ridiculous promotion says they 259 00:12:08,240 --> 00:12:11,560 told investors in November that the shrimp deal contributed to 260 00:12:11,560 --> 00:12:15,560 an $11 million loss for Red Lobster for an entire quarter. 261 00:12:15,880 --> 00:12:20,000 In one quarter, they're losing $11 million on this one loss 262 00:12:20,000 --> 00:12:22,080 leader promotion. There's actually videos of 263 00:12:22,080 --> 00:12:25,640 people going into Red Lobster, not ordering anything else and 264 00:12:25,640 --> 00:12:28,400 just scarfing down as much shrimp as they could, some of 265 00:12:28,400 --> 00:12:31,520 them eating 60 or 70 individual pieces of shrimp. 266 00:12:31,600 --> 00:12:35,240 Red Lobster lost money on every single patron that did this. 267 00:12:35,320 --> 00:12:37,960 That was a poorly thought out promotion by the management, but 268 00:12:37,960 --> 00:12:39,680 that wasn't the biggest mistake they made. 269 00:12:39,760 --> 00:12:43,160 The chain's real estate portfolio is a huge problem 270 00:12:43,480 --> 00:12:47,040 created in part by Red Lobster's former owner, Golden Gate 271 00:12:47,040 --> 00:12:49,000 Capital. When Darden Restaurants, which 272 00:12:49,000 --> 00:12:50,800 was the previous owner of Red Lobster. 273 00:12:50,800 --> 00:12:55,120 When they sold Red Lobster to a private equity firm in 2014, it 274 00:12:55,120 --> 00:12:59,160 funded the $2.1 billion acquisition partially through a 275 00:12:59,200 --> 00:13:01,840 $1.5 billion sale leaseback agreement. 276 00:13:01,920 --> 00:13:04,120 Under the terms of the agreement, the majority if not 277 00:13:04,120 --> 00:13:07,120 all of the Red Lobster locations were sold off and the chain had 278 00:13:07,120 --> 00:13:09,520 to start paying rent on properties it once owned. 279 00:13:09,760 --> 00:13:11,520 While Golden Gate reaped the profit. 280 00:13:11,520 --> 00:13:14,760 At the same time sales started to drop, they could no longer 281 00:13:14,760 --> 00:13:17,120 afford the leases. So we have two major issues so 282 00:13:17,120 --> 00:13:19,160 far. First of all, their promotional 283 00:13:19,160 --> 00:13:22,400 loss later deal was a big problem for the company, losing 284 00:13:22,400 --> 00:13:24,000 10s of millions of dollars per quarter. 285 00:13:24,360 --> 00:13:27,600 The second issue is that they no longer own the locations they're 286 00:13:27,600 --> 00:13:29,840 running out of. They're now paying rent on them, 287 00:13:30,000 --> 00:13:32,400 with rents rising every single year. 288 00:13:32,400 --> 00:13:34,600 If they own the properties outright, they wouldn't have to 289 00:13:34,600 --> 00:13:37,160 deal with rising rents. These two issues combined with 290 00:13:37,160 --> 00:13:40,080 lower sales contributed to their bankruptcy, but there is still 291 00:13:40,080 --> 00:13:42,360 one major issue. Another issue contributing to 292 00:13:42,360 --> 00:13:45,800 Red Lobster's demise was one of their biggest investors, Thai 293 00:13:45,800 --> 00:13:48,000 Union Group. They're also one of the world's 294 00:13:48,000 --> 00:13:51,800 largest suppliers of seafood. Once they bought Red Lobster, 295 00:13:51,920 --> 00:13:55,600 they made it so that they had to exclusively get seafood from 296 00:13:55,800 --> 00:13:58,080 company. So Thai Union Group, the largest 297 00:13:58,080 --> 00:14:00,640 investor, was the exclusive supplier of seafood. 298 00:14:00,920 --> 00:14:04,000 And they also controlled the prices of the seafood, which 299 00:14:04,000 --> 00:14:07,040 some believe forced Red Lobster to pay above market rates for 300 00:14:07,040 --> 00:14:09,800 their seafood. So Thai Union Group extracted as 301 00:14:09,800 --> 00:14:12,520 much money as they could out of this investment through 302 00:14:12,520 --> 00:14:15,720 supplying overpriced seafood. Ultimately, Red Lobster could 303 00:14:15,720 --> 00:14:17,640 not afford to deal with all of these issues. 304 00:14:17,840 --> 00:14:20,320 They're paying too much in rent, they're paying too much in food 305 00:14:20,320 --> 00:14:22,200 product. Their sales are dropping. 306 00:14:22,200 --> 00:14:25,000 So the company is now a Chapter 11 bankruptcy looking for a 307 00:14:25,000 --> 00:14:27,680 buyer, and they're closing hundreds of locations. 308 00:14:27,680 --> 00:14:30,000 The biggest take away from the story is it's important to 309 00:14:30,000 --> 00:14:32,080 control all these external factors. 310 00:14:32,160 --> 00:14:34,880 Texas Roadhouse, for instance, owns their locations. 311 00:14:35,120 --> 00:14:37,160 They have much better control over their rent. 312 00:14:37,520 --> 00:14:40,840 They have no exclusive provider of all of their beef. 313 00:14:41,240 --> 00:14:43,400 They can get the best market price available. 314 00:14:43,520 --> 00:14:46,080 The management team is incredibly experienced in 315 00:14:46,080 --> 00:14:48,560 promotions. They're not going to do $20 all 316 00:14:48,560 --> 00:14:51,440 you can eat premium steak deals. They'll never do a promotion 317 00:14:51,440 --> 00:14:53,720 that loses an enormous amount of money for the company. 318 00:14:53,800 --> 00:14:56,080 They're far too experienced in the restaurant industry to run 319 00:14:56,080 --> 00:14:58,400 such a poor promotion. So while it's unfortunate that 320 00:14:58,400 --> 00:15:01,360 Red Lobsters closing and the company is going bankrupt, that 321 00:15:01,360 --> 00:15:04,360 is a story of a complex set of factors and a lot of 322 00:15:04,360 --> 00:15:06,280 mismanagement. And I don't have any concerns 323 00:15:06,280 --> 00:15:09,040 that crossing over to Texas Roadhouse or Chipotle. 324 00:15:09,040 --> 00:15:10,800 Now, that's going to be it for this episode. 325 00:15:10,800 --> 00:15:13,080 So I apologize again for the poor voice in this video. 326 00:15:13,200 --> 00:15:15,080 Hopefully I'll be back to 100% soon. 327 00:15:15,320 --> 00:15:16,920 That's all for now. See you in the next one.