Jason Moser (3:09)

I mean, yeah, I think it holds a lot of potential. And like you mentioned, they're forecasting those sales of 15 million Switch 2s and also 45 million games during the fiscal year ending in March 2026. And, and I, you said it. I mean that does sound like it could be conservative. And now I think pricing will be something to watch here. It's a more expensive device, which could work out really well or maybe not, depending on how sensitive the consumer is. But we also know that consumers can be a bit irrational at times. They're going to buy what they really want to buy. But, and it's funny, I was just reading this article about a consumer, this guy who was just helping on getting one of these devices and waited in line for like 61 days, like he got an Airbnb, arranged for friends to go sort of take his place in line and in wait for him while he went and got some rest. So these are interesting times. It kind of reminds you of Apple devices when, when you see people just storming the doors of Apple stores to get the new phone phone or whatever it may be. This device definitely has that same sort of level of demand. And so my bet is particularly as we get into the holiday season here, this is going to be one of those IT devices for a lot of folks. So I think the back half of the year this could be really meaningful. And you said it too, the original switch coming out March 2017, it's lived a very long life and obviously sold a ton of of devices. I think the Switch 2 has, has the same potential.

Mary Long (4:42)

Oh yeah, the right products can get people at the doors to, to purchase it. You had to be on a pre order list in order to like be able to buy the Switch in a lot of stores. Walmart, Best Buy already kind of selling out of the product. I was reading that Best Buy and Walmart were having like midnight opening launches for the release of the Switch. And yet Jamo, in spite of the popularity of the original device, the seeming popularity that we're already seeing of this one, and that upward direction of the stock price that I mentioned since the Switch 1 came out, Nintendo Sales have actually been pretty lumpy slash broadly declining since 2020. Operating margins also taken a pretty steep hit since then. Net margins also tightening, though at a lesser clip than operating margins. Why has the stock seen such positive momentum despite the fact that this is not a company that's actively and consistently growing on either the top or the bottom line?

Jason Moser (5:36)

Yeah, that's a good question. And I think part of it really centers around that this, this is kind of a hit driven business. And so it makes me think of something like Disney's movie business for example. Right. It's just inherently lumpy because it takes time to develop the tech and, or the content. You don't know if everything is going to be a hit with consumers. And so I think investors, I think the market generally, that's not a secret. We know these types of businesses are just, they're hit generated, they can be lumpy at times. But when they have a track record of demonstrated success like Nintendo does. Right. Tremendous ip, obviously, tremendous technology with the Switch, I think the market gives it a little bit of credit and kind of looks past the lumpiness of that business. And I mean that, that really speaks to the fact, I mean we know the market is a forward looking mechanism and so it anticipates these types of releases and maybe gives the company a little credit in saying we know it's going to take time to bring out this next iteration of whatever game of whatever device. And then finally, I mean the one constant with Nintendo is they just have a ton of valuable intellectual property in the content. So there's value in that even if it's not realized on a completely linear timeline.

Mary Long (6:55)

I'm glad you made that comparison to Disney because it's worth noting that the video game industry is really big. I think it's easy if you're not maybe a self proclaimed gamer to think of it as being more niche. But in 2024, the video game industry generated $187.7 billion globally. That's across consoles, PCs and mobile. By comparison, the global box office generated $32 billion last year and music streaming ranked in about 20.4. So even though we think of those industries, film, music, as being more, maybe more broad, the video game industry makes a lot of money. And that's, I think again, if you kind of categorize yourself as not falling within that, something that's easy to forget. Yeah, the gamers in my life, they've told me that the Nintendo Switch in its original iteration is quote perfect. And so to build out a second iteration of this Console is actually an interesting move for Nintendo because they've previously built out new gaming consoles rather than update old ones. So from Nintendo you've gone from, you know, you mentioned the Game Boy advance, but you've got the GameCube, you've got the Wii, then you've got the Switch. Whereas with the PlayStation, say you go from the PS2 to the 3 to the 4 to the 5. The 5, just for the record, was last released in 2020. So this seems like a market change in Nintendo's strategy. Do you make anything of that?

Jason Moser (8:14)

I think it, I mean it makes sense. I think when you nail something like this, right? I mean they obviously really captured lightning in a bottle with the original Switch. It makes a lot of sense to iterate on that, right. I mean it reminds me of Apple and the iPhone, right. I mean they just continue to iterate on the iPhone. It's essentially the same thing for the most part. Maybe a little improved here on the battery or the camera side, but they just know they've captured something there. And it makes sense to go ahead and iterate on that because you see the consumer demand is there and I mean the technology as it ages, right, it slows down and as we move in towards this more mobile society, I think this things, it seems like a smart thing to do. Assuming now we're making the assumption that this Switch to is going to get a positive reception. I mean I think it will but the there if there are issues then I mean it's going to be imperative that leadership actually listens and adjusts if needed. But yeah, I think it makes a lot of sense when you really, when you really nail something like this. Yeah, go ahead and keep that ball rolling and ride that thing as long as you can. Iterate, iterate, iterate. And I think that it would make perfect sense to expect a switch 3 in the next 5 or 7 years. I guess we'll wait and see there. But definitely to your point there on just how massive the global gaming market really is, it's just amazing and it is truly global. And now that it is more mobile and Nintendo is kind of scratching that itch, it really makes a lot of sense for them to keep pursuing this particular design.

Mary Long (9:53)

The two other big players in that very big video game market are Sony and Microsoft. And Nintendo is very different from them, not just in their, their, their hardware strategy leading up to this point, but also in that whereas Sony and Microsoft largely rely on third party game developers, nearly all of Nintendo's most popular franchises are based on homegrown Nintendo IP and are exclusive to the Nintendo platform. So recognizing that, okay, Microsoft's got a lot of other things going on. So the comparison, that complicates the direct comparison a bit. If you could only own one of these gaming companies, which one would it be?

Jason Moser (10:32)

I think it would probably be Microsoft now, given its diversity. The only other gaming company I've really ever had interest in as an investor and I own shares of it personally at the time and shoot, my father even, I even got my father in the stock back in the day and it worked out really well for him. So hey, good son, I'm taking a little credit for that one with Activision Blizzard, right? And we know Activision Blizzard eventually acquired by Microsoft. And so I mean I like that they have those properties. I like that the Xbox, very powerful platform. And I think that given the number of ways Microsoft can succeed in just the massive scale of the business to go with all of that Activision Blizzard goodness, to me that would make the most sense for me personally as investor. But you keyed in on a very important point there with Nintendo and I think it's overlooked and I think that's why the market gives it credit and I think that's why the stock has performed so well, is just that tremendous catalog of intellectual property. It's theirs and it's unique and it's something that they have full control over and it really helps connect sort of the hardware to the content and lets them control their own destiny a little bit more.

Mary Long (11:48)

Maybe we'll turn to earnings from the discount retailer five Below, which posted first quarter earnings earlier this morning. Jimmo, unfortunately we're not going to be able to buy the Nintendo Switch 2 at a 5 below. But looking at these results, things were pretty impressive. You've got revenue up 20%, same store sales up 7%. Profit also on the up and up, hitting $41.5 million, up from 31 and a half million dollars a year ago. They're also expanding their footprint, opened 55 new stores last quarter. And on top of all of that, management expects all of these trends to continue. They're guiding for an increase in sales and planning to continue opening more stores. What's your headline from five Below report?

Jason Moser (12:32)

Well, I think you just said it, Mary. I mean all of that stuff is just so impressive. I mean I saw those numbers, I looked at that morning when I got up and I, I, I was really, I was just really impressed about top line growth of 20%. On top of those positive comps at 7%, I mean, wow. You know, for a company that's kind of gone through a little bit of a tough stretch here recently, they definitely seem to be coming out on the other side, expanding that store footprint. They're going to continue doing that in the coming quarter. There were just a lot of really good numbers in this report. So I think there's not one thing that stood out. It was just a lot that stood out and it felt like it was all really positive.

Mary Long (13:13)

I want to double click on the guidance because management upped its revenue and same store sales expectations for the next quarter. Yes, 5 below is a discount retailer, but it almost exclusively sells discretionary items. And so, you know, CEO Winnie park described it on the earnings call as, quote, the Cool store for kids and the yes store for parents. So nothing here is like something that anyone really needs to buy. I think that's an interesting spot to be in if you're facing a potential economic downturn, that you're the discounter, but you're discretionary. Do you think it's realistic for 5 below to keep growing if the economy starts to contract?

Jason Moser (13:51)

I think it is. I mean, they may not be as sensitive to macro conditions as others, given their nature. I think you put it very well in being the cool store for kids and the yes store for parents. Right. And there, there's a lot to that and you kind of know what you're getting when you go there. Probably don't need to use a lot of buy now, pay later stuff that you get from there, Right. So it's a pretty, pretty easy lift if you go there and just, you know, if you've ever been in a five Below. I mean, even, I mean, I'm not really a stuff guy, but even when I go into a five Below with my kids, I'm like, wow, this is just kind of a fun experience, right? I mean, there's always something in there I feel like I would want to walk out with. And I think particularly in, in tougher economic stretches, I think that actually becomes even a little bit more attractive for the consumer. Yes, it's discretionary, but the value proposition is so clear, right. And you know that you're not going in there necessarily to spend a ton of money. You're going in there to spend a little money, have a fun experience and maybe walk out with something that, that, that, that makes you smile. So I, I, I do, I do like their position in, in tougher economic times as well.

Mary Long (15:07)

I feel like we also got to hit tariffs if we're talking about this, this company Management noted that, okay, that updated improved guidance that we've mentioned reflects the impact of tariff rates that are currently in place. So you've got, just as a refresher for anybody who's keeping score or confused by the back and forth of the tariff situation, reciprocal tariffs are paused at the moment, but you've still got a 10% base tariff on all imported goods and 125% tariff on goods from China. So other retailers can adjust their prices in response to these tariffs. But Five Below is kind of backed into a corner of its own doing slash naming because they've got kind of got to absorb the tariffs in order to keep their value proposition intact. To that means, okay, its margins will likely be impacted by any of the tariff situation moving forward. And yet Five Below only expects its operating margin to decline around 200 basis points compared to last year. That feels really small to me. How does that math, James?

Jason Moser (16:06)

Well, it could be, that could be a bit of an optimistic prediction. So you look, you look at a business like this where gross margins could be more exposed, but due to just the nature of the cost of goods sold, they do have some levers they can pull on the operating side and like the SGNA side of the business, try to help mitigate those impacts a little bit. But you're very right. I mean, you can look in their, their 10K. It's very clear. I mean, they say it, a significant majority of our merchandise is manufactured outside of the United States with China as the single largest source of merchandise we import and source from domestic vendors. So they are exposed here. Now, I think there's, there's another dynamic to this business though, that is kind of interesting. It's, it's the fixed cost nature of the business. Right? You're talking about retail stores and restaurants. I mean, there are a lot of fixed costs involved there, right? Just the cost of rent for keeping the store open, the cost of labor for keeping the store staffed. Right. Those really don't change too terribly much. So for a company like Five Below, it really does kind of boil down to traffic in comps. And I think that's where the guide comes into play here because, you know, they're guiding for comp sales to increase between 7 and 9% versus a negative 5.7% comp in the second quarter of last year. So that, that's a very wide delta in a good way right there. There should be significant improvement there in overall store traffic and comp sales. And I think that's something that could help mitigate the impact of potential tariffs. Again, I mean, it's, it's obviously very, very headline driven and we don't know exactly what's going to happen there. But I do at least understand the guide based on, based on, based on what they're saying there in regard to comps.

Mary Long (17:51)

Despite this very impressive quarter, this is a company that's, that's struggled in more recent history. You've got a new CEO at the helm of the company. That's Winnie Park. She's only seven months into the gig and again came aboard during a pretty uncertain time for the company, namely because its stock was still recovering, is still recovering from a steep decline about a year ago after it posted particularly disappointing results. You zoom out over the past five years and Five Below has undoubtedly underperformed compared to the S and p. It's up 23%, but that's compared to the index's near double. What does success look like for Winnie park but also for Five Below?

Jason Moser (18:29)

Sure. I think first and foremost, managing the company through this, through this tricky time, I mean, this is, this is, it's different for everyone, but particularly in retail and for a company like Five Below that is so exposed to international supply chains, I think just kind of getting through this first and foremost in the near term and then ultimately just getting back to what has always served the company so well. And that's the value proposition. Right? I mean, there are just some things that are out of their control. This tariff stuff is kind of one of them to an extent. But driving traffic will be key if she can continue to do that and if the tariff, the tariff environment will ease at some point. Right. This isn't a forever problem. It is something that's going to impact these businesses in the near term, but it's not a forever issue. Then I think things start to look a little bit better. And I do want to say too, I want to give her credit because they mentioned this on the call. They are not, they are not just sort of pushing this China issue aside. I mean, they are looking at ways to diversify their supply chain. Noted in the call that they've already made efforts in reduction in goods sourced from China and they've quantified that they've reduced the goods sourced from China by about 10 percentage points for going into this back half of the year. So, I mean, that's still not a lot given that they are so dependent on that China supply chain. But it's a start and it tells us that that's a big point of focus for her that I think they will continue working on. And I think that'll ultimately benefit them in the near term, perhaps in the long term as well. So it'll be fun to watch how this all. How this all works out.

Mary Long (20:06)

It all comes back to the value prop. When in doubt, stick to that. Jason Moser, thanks so much for the time. Always a pleasure to have you on Motley Fool Money.

Jason Moser (20:14)

You got it, Barry. Thank you.

Mary Long (20:16)

As always. People on the program may have interest in the stocks they talk about. And the Motley fool may have formal recommendations for or against Stone buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley fool money team, I'm Mary Long. Thanks for listening. We'll see you tomorrow.