TickerTalk Headlines for August 19th
In this newsletter:
Retail Earnings: Value, Caution, and Luxury in a Shifting Market
Retail sector earnings season is about more than the statistics and metrics of your favorite retail brand. It's a window into the evolving dynamics of consumer behavior and the economic forces shaping multiple industries. The interplay between consumer staples and consumer discretionary spending is crucial to understanding these dynamics. Analyzing earnings reports through this lens provides investors with valuable insights into which segments of the economy are thriving and which are facing challenges. This week’s reports from retail giants Walmart (NYSE: WMT), Home Depot (NYSE: HD), and Tapestry (NYSE: TPR) offer a compelling glimpse into a market where consumers are making calculated choices, balancing their desire for value with concerns about economic uncertainty and shifting consumer priorities.
Walmart: Value Reigns Supreme
Despite inflationary pressures, Walmart continues to prove its resilience and ability to cater to the value-conscious consumer. Walmart’s earnings report for the second quarter of 2024 showcased this strength, revealing a retailer strategically positioned for success in an environment where affordability is essential.
Walmart's revenue increased by 4.8% to $169.3 billion. The critical metric of comparable store sales in the United States, which increased by 4.2%, served as the driving force behind this growth, indicating the strong performance of existing retail locations. This highlights Walmart's success in attracting and retaining customers seeking value for their everyday essentials.
Beyond brick-and-mortar, Walmart's omnichannel strategy is paying off. Global eCommerce sales are up 21% year-over-year, reflecting the company's online and offline shopping experiences integration. This flexibility caters to diverse consumer preferences and fuels growth across both channels.
Walmart's commitment to cost control is evident in its operating income growth of 8.5%, reaching $7.9 billion, outpacing revenue growth. This efficiency further strengthens Walmart's ability to offer competitive prices in an inflationary landscape.
Walmart’s financial performance has bolstered internal confidence in the future, leading to a raised FY25 guidance. Net sales are now expected to grow between 3.75% and 4.75%, up from the initial 3.0% to 4.0% projection. Similarly, adjusted operating income is projected to grow between 6.5% and 8.0%, compared to the previous range of 4.0% to 6.0%. This upward revision signals a positive outlook for the remainder of the fiscal year, suggesting continued growth potential for the company.
Home Depot: A Dip in DIY
While Walmart thrives in a value-driven market, Home Depot's earnings for Q2 FY2024 reveal a narrative of caution and uncertainty in the home improvement sector. The company reported a 0.6% sales increase to $43.2 billion, primarily attributed to the acquisition of SRS Distribution Inc. However, excluding this, comparable sales declined by 3.3%, indicating a softening of consumer demand for home improvement projects.
Adding to investor concerns, Home Depot revised its FY2024 guidance, now projecting a decline in comparable sales for the full year. This shift underscores the company's headwinds, primarily linked to the cooling housing market and broader economic anxieties. Operating income for Q2 FY2024 also declined slightly to $6.5 billion, a drop of 0.8% compared to the previous year.
Rising interest rates are critical, making home equity loans more expensive and impacting affordability for large-scale renovations. While declining lumber prices benefit Home Depot through lower input costs, they also signal weaker demand in the overall building industry. Furthermore, consumer spending patterns are shifting, with a greater emphasis on services and experiences, potentially diverting funds away from home improvement.
Home Depot recognizes these challenges and is pursuing strategic adaptations. To lessen its dependence on the more economically sensitive DIY consumer, the company is focusing on strengthening its appeal to professional contractors and builders (Pro customers) within the construction sector. This involves expanding its Pro-focused product offerings and services, including tailored delivery options and dedicated account management.
Additionally, Home Depot is shifting its emphasis towards smaller-scale projects and essential repair products. Recognizing that consumers may be more inclined towards budget-friendly home maintenance, the company is highlighting affordable solutions and DIY guidance for essential repairs and upgrades.
By adapting to the evolving consumer landscape and diversifying its customer base, Home Depot aims to navigate the current headwinds and maintain its position as a leader in the home improvement market.
Tapestry: Luxury Proves Resilient
Tapestry's earnings report for fiscal year 2024 contrasts the cautionary tale emerging from Home Depot's earnings. Tapestry is home to brands like Coach, Kate Spade, and Stuart Weitzman, demonstrating the enduring appeal of luxury despite economic uncertainty. Net sales reached $6.67 billion, demonstrating resilience despite a currency exchange headwind. Excluding this impact, revenue increased 1% year-over-year. Operating income climbed to $1.14 billion, a 17.1% operating margin, reflecting the power of brand strength and strategic expansion.
Coach, Tapestry’s flagship brand, achieved a record-breaking annual revenue exceeding $5 billion, underscoring its enduring global appeal. International growth was a key driver, with sales increasing by 6% on a constant currency basis. Europe saw a 14% surge, while key markets like South Korea and Singapore achieved a 9% increase. These results highlight the effectiveness of Tapestry's global expansion strategy in capturing new markets and diversifying revenue.
Tapestry's double-digit adjusted earnings per share EPS growth (13.7% for the fiscal year) and lower tax rate are compelling indicators for investors. The company expects continued growth in FY25, demonstrating confidence in its ability to navigate a potentially challenging macroeconomic environment. Tapestry's pending acquisition of Capri Holdings Limited (NYSE: CPRI) adds complexity and is expected to close in 2024. While facing regulatory scrutiny, the deal promises significant market expansion and potential synergies. Successfully navigating these hurdles will be vital in realizing the acquisition's full potential.
A Divided Retail Landscape
The contrasting performances of Walmart, Home Depot, and Tapestry underscore a divided retail landscape. Walmart's success highlights the enduring power of value-focused strategies in attracting price-conscious consumers. Conversely, Home Depot’s challenges reveal the vulnerability of discretionary spending to macroeconomic headwinds. Tapestry's performance demonstrates the resilience of the luxury market, even as it faces potential risks from its pending acquisition and the broader economic environment. For investors, careful analysis of these trends, company-specific strategies, and macroeconomic factors is essential for making informed decisions. Understanding the complexities of the current retail landscape is crucial for developing successful investment strategies.
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Is YETI Stock an Outlier or a Sign of a Strong Brand?
Earnings season is always good for a few surprises. One name that's surprising to the upside is YETI Holdings Inc. (NYSE: YETI). The company, which makes iconic coolers and focuses on those who love the outdoors, beat expectations with earnings per share (EPS) of 70 cents on revenue of $463.50 million.
Both numbers beat analysts' expectations, but the year-over-year (YoY) growth was particularly impressive. Revenue was up 13% YoY, and EPS was up 37% YoY. The company also raised its forward guidance. Sales in the current quarter are expected to be in a range of 8% to 10% versus the prior guidance of between 7% and 9%. Adjusted net income is expected to be in a range between $2.61 and $2.65 per share above prior guidance of $2.49 to $2.62.
During a week that saw stocks under considerable pressure and growing concerns about a tapped-out consumer, this report was hard not to notice.
Investors sure didn't. YETI stock jumped approximately 17% after the report to around $43.50 per share. That nearly had the stock busting above a resistance level established in June. However, the stock is still down 19% year-to-date, which could make this a buying opportunity. But first, investors looking to get involved have some things to consider.
YETI's Positive Earnings Report Could Mean Many Things
What makes YETI's earnings results more surprising is that the company's products are firmly in the discretionary category. Furthermore, YETI is a premium brand.
On the one hand, that indicates that the company attracts consumers with the income to invest in high-end products. This supports the bifurcated economy thesis that has settled in. That is, those that have the means to spend continue to do so.
If that's the case, consumers have had reasons to buy YETI products in the past few months. The company has an entire product line geared to the back-to-school market. This quarter also covered the start of camping season and Father's Day.
To expand its target audience, YETI recently announced a licensing agreement with the National Football League and a team partnership with the Dallas Cowboys. This comes just in time for tailgate season across the country. And it's just one of the numerous corporate partners that use the company's products as rewards and gifts.
On the other hand, the market has seen other companies with premium brands such as Lululemon Athletica Inc. (NASDAQ: LULU) deliver solid earnings. Yet, LULU stock is down more than twice YETI stock in 2024.
Some may argue that Lululemon's stock troubles boil down to concerns over execution and innovation. But it's still worth noting that the two stocks are on much different paths.
Then There's a Practical Angle for YETI
Anyone who's been without power for several days or had an appliance stop working knows that one of the biggest concerns is food spoilage, particularly of frozen food. YETI coolers can help keep fresh and frozen food protected for days.
It's not something that consumers will list as their first reason for owning a YETI product, however, at a time when food costs remain elevated, having a backup plan could make the company's products a worthwhile investment.
That may also explain the company's significant increase in international cooler sales, which were up 35% and 12% higher than U.S. sales.
Is YETI Stock Undervalued?
The YETI analyst forecasts on MarketBeat give YETI stock a consensus Hold rating with a price target of $46.29. That's a 10% gain from the stock's closing price on August 15, 2024. The price target also aligns with projected earnings growth of around 13%, which is the argument for a fairly valued YETI stock.
However, despite the recent stock price gains, YETI stock has a forward P/E ratio of around 17x earnings. That's below the sector average for consumer discretionary stocks, which is around 22x. Could that mean that the stock is trading at a discount?
Lower interest rates may be the deciding factor. If there's latent demand being held back, it may start showing up in the company's reports in the back half of the year. There's a large gap to fill to YETI stock's 52-week high, but that could be a reward for patient investors.
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The Worst May Be Over for Cisco After Beating Estimates in Q4
Cisco Systems (NASDAQ: CSCO) is a U.S. technology firm and is the world’s largest company in the communications equipment industry. Shares have seen significant underperformance compared to its sector, down 4%. The Communication Services Select Sector SPDR Fund (NYSEARCA: XLC) is up nearly 19%.
The company has underperformed as it struggles to keep up with competitors offering better cloud data center solutions. In particular, Arista Networks (NYSE: ANET) has taken advantage of this fast-growing market, catering to what these customers want. As a result, it has been among the hottest stocks in the market over the past 52 weeks, up over 100%.
However, Cisco posted better-than-expected results in its fiscal Q4 2024 earnings, released on Aug. 15. Shares were up nearly 7% following the release. Is this a sign that things are turning around for Cisco, or is it simply a blip on the radar? I’ll analyze this by first explaining Cisco’s business and reviewing the earnings report. I’ll detail some areas for optimism, review analyst price target changes, and provide some outlook on the stock.
Cisco: A Giant Player in Networking Solutions
Cisco’s operating segments are based on geography, but a more beneficial way to look at the company is through its product categories. In the latest quarter, 50% of the company’s revenues came from its Networking products.
This category provides solutions for switching, enterprise routing, and wireless. These solutions help send data between computer networks, manage the flow of data within a network, and enable devices to connect to the internet wirelessly.
Another 13% of revenues came from its Security products, and 8% from its Collaboration products. Additionally, 28% of revenue came from services related to all its product categories.
Markets Pleased as Cisco Beats Estimates on Earnings and Revenue
Cisco’s adjusted earnings per share (EPS) posted a positive surprise of 2.5%, coming in at $0.87. It fell 24% from the previous year. Sales also came in slightly less than 1% above estimates at $13.6 billion and fell 10%.
The company’s adjusted EPS guidance for 2025 was in line with estimates at $3.55. Networking revenue decreased 28%; however, security revenue shined, jumping 81%. This was largely due to the company’s acquisition of Splunk. Without it, revenue would have increased only 6%.
Cisco also announced it is laying off another 7% of its workforce, bringing the total number of layoffs this year to about 9,000. This follows layoff announcements for another legacy tech industry giant, Intel (NASDAQ: INTC), which will cut 17,500 jobs in its fiscal year 2025.
Several Metrics Show Reasons for Optimism
One of the more positive developments for Cisco was its 6% increase in organic order growth, an indicator of future revenues. Orders didn’t grow in Q3, largely due to customers having too much inventory they had yet to install. This shows that organic revenue levels may be bottoming. Including Splunk, the number increased 14%.
The company has also seen a strong increase in remaining performance obligations, which increased 18%. This is revenue that the company has contracted but cannot recognize yet. These factors could provide an opportunity for Cisco’s core business to stop declining.
The firm also showed progress in transitioning to a more software-based company. Software revenue grew 9% and now makes up 34% of total revenue. Investors should view this positively since software margins are typically higher than hardware margins, which is Cisco's historical business.
Outlook and Updated Wall Street Price Targets
The company's shares are trading at a forward price-to-earnings ratio of 13.6, below 80% of U.S. tech firms. Wall Street expects sales to grow very mildly over the next three years, at only around 4% annually. Adjusted EPS is expected to increase by 6% annually.
Given these relatively low expectations, it's certainly possible the firm could outperform. From 2021 to 2023, the company grew adjusted EPS by over 9% per year. The positive future-looking metrics in the firm’s latest earnings report could support higher-than-expected growth. Additionally, Splunk will continue to provide growth and increased capabilities.
Overall, Wall Street analysts increased their average price target for Cisco by less than 1% after the earnings release. This suggests these analysts were not as excited by the earnings as the market. Among five analysts who updated their target, the implied upside for the firm sits at 9%.
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