Market Snapshot
briefing.com
| Dow | 33084.53 | -201.96 | (-0.61%) | | Nasdaq | 12580.39 | -140.56 | (-1.10%) | | SP 500 | 4152.28 | -41.62 | (-0.99%) | | 10-yr Note | +1/32 | 3.706 |
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| | NYSE | Adv 1085 | Dec 1742 | Vol 900 mln | | Nasdaq | Adv 1938 | Dec 2496 | Vol 4.3 bln |
Industry Watch
| Strong: Energy |
| | Weak: Materials, Consumer Staples, Health Care, Industrials |
Moving the Market
-- S&P 500 unable to close above 4,200 has been a limiting factor
-- Congressional leaders telling reporters that there is not a lot of progress being made on the debt ceiling
-- Rising Treasury yields
-- Weak mega cap stocks
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Closing Summary
23-May-23 16:30 ET
Dow -231.07 at 33055.42, Nasdaq -160.53 at 12560.42, S&P -47.05 at 4146.85
[BRIEFING.COM] The stock market spent most of the morning little changed from yesterday's closing levels. Mega cap stocks had been a drag on the main indices for the entire session, yet the broader market was holding up okay.
Things started to deteriorate, though, as market participants learned from press reports that a debt ceiling deal was not imminent. House Speaker McCarthy told House GOP members that they are nowhere near a deal, according to Punchbowl News, while House Minority Leader Jeffries told reporters there is not a lot of progress being made on the debt ceiling. Also, Representative McHenry told reporters that both sides still have "significant differences on spending."
Also, reports about a new Covid wave sweeping through China also impacted sentiment, as optimism about China's reopening activity took a hit.
A broad retreat saw the S&P 500 and Nasdaq down more than 1.0% by the close. The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.1% while the Vanguard Mega Cap Growth ETF (MGK) closed down 1.6%. Declining issues led advancing issues by a 5-to-3 margin at the NYSE and a 4-to-3 margin at the Nasdaq.
Ten of the 11 S&P 500 sectors logged declines ranging from 0.3% (utilities) to 1.5% (materials). The S&P 500 energy sector (+1.0%) was alone in positive territory by the close. Chevron (CVX 156.85, +4.41, +2.9%) offered a boost to the sector after it was upgraded to Buy from Hold HSBC.
The consumer discretionary sector (-0.9%) was a relative outperformer, partially supported by a gain in Lowe's (LOW 206.65, +3.50, +1.7%) after the company reported earnings.
Notably, regional bank stocks, which had outperformed all day, faded from higher levels seen earlier, but still ended the day higher. The SPDR S&P Regional Banking ETF (KRE) rose 1.0% after being up as much as 4.0% earlier in the session.
Treasuries settled on a mostly higher note, recovering from earlier losses as debt ceiling uncertainty seeped into trading. The 2-yr note yield was unchanged at 4.34%, garnering some added strength from a $42 billion 2-yr Treasury note auction that was met with excellent demand. The 10-yr note yield fell two basis points to 3.70%.
- Nasdaq Composite: +20.0% YTD
- S&P 500: +8.0% YTD
- Russell 2000: +1.5% YTD
- S&P Midcap 400: +0.6% YTD
- Dow Jones Industrial Average: -0.3% YTD
Reviewing today's economic data:
- The IHS Markit Manufacturing PMI fell to 48.5 in the preliminary May reading from 50.2. The IHS Markit Services PMI rose to 55.1 in the preliminary May reading from 53.6.
- New home sales increased 4.1% month-over-month in April to a seasonally adjusted annual rate of 683,000 units (Briefing.com consensus 660,000) from a downwardly revised 656,000 (from 683,000) in March. On a year-over-year basis, new home sales were up 11.8%.
- The key takeaway from the report is that higher mortgage rates are impeding stronger new home sales activity, evidenced by the sales declines in the higher-priced Northeast and West regions that reflect increased affordability pressures created by the higher mortgage rates.
Kohl's (KSS), Analog Devices (ADI), Petco Health and Wellness (WOOF), Abercrombie & Fitch (ANF), and The Children's Place (PLCE) are among the notable companies reporting earnings ahead of the open tomorrow.
Market participants will receive the following economic data on Wednesday:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -5.7%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior +5.04 million)
- 2:00 p.m. ET: Minutes from the May 2-3 FOMC meeting
Treasuries settle mostly higher
23-May-23 15:30 ET
Dow -183.56 at 33102.93, Nasdaq -140.56 at 12580.39, S&P -39.33 at 4154.57
[BRIEFING.COM] Things are little changed heading into the close.
Treasuries settled on a mostly higher note. The 2-yr note yield was unchanged at 4.34% and the 10-yr note yield fell two basis points to 3.70%.
The CBOE Volatility Index jumped 7.7%, or 1.32, to 18.48 as the market declined.
Market participants will receive the following economic data on Wednesday:
- 7:00 a.m. ET: Weekly MBA Mortgage Applications Index (prior -5.7%)
- 10:30 a.m. ET: Weekly EIA Crude Oil Inventories (prior +5.04 million)
- 2:00 p.m. ET: Minutes from the May 2-3 FOMC meeting
Market remains near lows of the day
23-May-23 15:05 ET
Dow -201.96 at 33084.53, Nasdaq -140.56 at 12580.39, S&P -41.62 at 4152.28
[BRIEFING.COM] The main indices are trying to climb off their lows of the day. Even the Russell 2000, which had maintained slim gains for most of the session, has slipped into negative territory.
Energy complex futures settled the session mixed. WTI crude oil futures rose 1.2% to $72.91/bbl and natural gas futures fell 2.2% to $2.49/mmbtu.
After the close, Intuit (INTU), V.F. Corp (VFC), Toll Brothers (TOL), Palo Alto Networks (PANW), Agilent (A), Urban Outfitters (URBN), and New Relic (NEWR) will report earnings.
Kohl's (KSS), Analog Devices (ADI), Petco Health and Wellness (WOOF), Abercrombie & Fitch (ANF), and The Children's Place (PLCE) are among the notable companies reporting earnings ahead of the open tomorrow.
Tyson gains after completing sausage acquisition; AutoZone slips on earnings
23-May-23 14:30 ET
Dow -267.62 at 33018.87, Nasdaq -157.29 at 12563.66, S&P -46.16 at 4147.74
[BRIEFING.COM] The S&P 500 (-1.10%) is in second place, hovering now near session lows after the latest debt ceiling headlines signaled that both sides are still have differences on spending.
S&P 500 constituents Moderna (MRNA 138.55, +11.81, +9.32%), Albemarle (ALB 216.48, +9.98, +4.83%), and Tyson Foods (TSN 51.68, +1.57, +3.15%) dot the top of today's standings. MRNA is squeezing higher on Tuesday, ALB bucks the broader trend in chemical stocks, and TSN announced last night it completed its acquisition of Williams Sausage Company.
Meanwhile, AutoZone (AZO 2436.65, -183.15, -6.99%) is at the bottom of the index following earnings.
Gold lower again as dollar, yields move higher
23-May-23 14:00 ET
Dow -99.61 at 33186.88, Nasdaq -105.74 at 12615.21, S&P -30.37 at 4163.53
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (-0.83%) is today's top lagging major average.
Gold futures settled $2.70 lower (-0.1%) to $1,974.50/oz, registering their fifth loss in six days as the dollar and yields hold modest gains.
Meanwhile, the U.S. Dollar Index is up about +0.3% to $103.48.
Talk is cheap at pivotal crossroads
President Biden and House Speaker McCarthy reached an agreement yesterday... to keep talking. The agreement on raising the debt ceiling remains elusive, yet the party line from both leaders is that the conversation they had was productive and that they will continue to talk each day.
That is a positive-sounding indication, yet stock market participants are appearing fatigued by all the talk and the absence of the all-important action of raising the debt ceiling with June 1 lurking as a potential X-date when the U.S. might not be able to pay all its bills.
Currently, the S&P 500 futures are down 12 points and are trading 0.3% below fair value, the Nasdaq 100 futures are down 60 points and are trading 0.4% below fair value, and the Dow Jones Industrial Average futures are down 67 points and are trading 0.2% below fair value.
This softer tone isn't just about the debt ceiling, however. In fact, it is fair to say, with the S&P 500 near the top of a nine-month trading range and longer-dated Treasury yields backing up, that the market remains pre-disposed to believe a debt ceiling deal will get done, enabling the U.S. to avoid a debt default.
The debt ceiling drama has been a permanent distraction of late, but other components in the fray include the specter of the Fed continuing to raise rates, because inflation remains too high, even as other indications denote a slowing in economic activity.
These elements are part of the mix today.
The 2-yr note yield is up six basis points to 4.40%, leaving it up 34 basis points for the month; meanwhile, the preliminary May manufacturing PMI reading for the eurozone dropped to 44.6 from 45.8 in April (a number below 50.0 is indicative of contraction), and Lowe's (LOW) followed Home Depot (HD) with disappointing FY24 guidance, noting it has seen lower do-it-yourself discretionary sales.
Another hang-up for the stock market has been the inability of the S&P 500 to forge a close above 4,200 on heavy volume. Actually, it hasn't even been able thus far to forge a close above 4,200 on light volume.
The 4,200 level has put up some stern resistance since last August, which is why it is a closely-watched level now since the previous failures to close above 4,200 have been followed with periods of increased selling interest.
The debt ceiling uncertainty has created a valid excuse for the lack of conviction around 4,200, yet its importance as a key technical level to watch will ratchet up if, and when, a debt ceiling deal gets done. The presumption then will be that a deal should provide a breakout catalyst. If that breakout doesn't happen, as envisioned, the market will presumably be at risk of a corrective phase or more vulnerable to selling interest catalyzed by a fear of the Fed and/or an economic slowdown that crimps earnings prospects.
The stock market, therefore, is at a crossroads where talk is cheap and action is pivotal.
-- Patrick J. O'Hare, Briefing.com
Williams-Sonoma's reaffirm of guidance brings some comfort to a rough retail sector (WSM)
Furniture and home decor company Williams-Sonoma (WSM) reported mixed Q1 result that included a miss on the top-line and a 6.0% comp decline, but in light of the soft retail climate, its report is being viewed as better-than-feared. In particular, WSM's reaffirmation of its FY24 revenue forecast, which calls for a 3% decrease to a 3% increase in sales, is providing some relief to investors who were bracing for a guidance cut.
- There was good reason to worry, too, with leading retailers like Home Depot (HD), Lowe's (LOW), Target (TGT), and Ross Stores (ROST) each issuing downside guidance in recent days. Furthermore, competitor RH (RH) issued a pretty dismal Q4 earnings report in late March, badly missing EPS estimates while issuing weak guidance for Q1 and FY24.
- We certainly wouldn't characterize WSM's results and outlook as strong, especially for its struggling West Elm brand which posted a -15.8% comp in Q1. However, its business is holding up better than many retailers -- most notably including RH -- even as demand for higher ticket furniture offerings weakens.
- During the earnings call, CEO Laura Alber acknowledged that while WSM experienced subdued demand in the furniture business, the company saw strength in its decorating and textile categories. Similar to the recent commentary from HD and LOW, Ms. Alber stated that customers are opting for smaller, easier projects instead of costlier redesign projects.
- This shift is creating healthy demand for products like table linens, decorative lighting, frames, and bedding, particularly for the Pottery Barn brand.
- On that note, Pottery Barn was once again WSM's top performer with comps declining by just 0.4%, despite lapping a tough comp of +14.6% in the year earlier period.
- WSM also credits the "right-sizing" of the company and tighter cost controls for its earnings generation, which comfortably surpassed analysts' estimates at $2.64/share.
- As a percentage of revenue, SG&A improved by 100 bps yr/yr to 25.7% on a non-GAAP basis, helping to offset a 520 bps drop in gross margin to 38.6%.
- One clear blemish is gross margin, which continues to slide lower. After declining by 380 bps yr/yr in Q4 to 41.2%, gross margin eroded further in Q1, plunging by 520 bps yr/yr to 38.6%. The company blames higher inbound and outbound shipping and freight costs for the margin declines, but we believe some promotional pricing is also playing a role.
- It seems likely that WSM may be taking some market share from RH, which has remained steadfast in its approach of avoiding promotional activity in order to protect its brand.
Overall, WMS's Q1 report reflects the challenging retail environment as its revenue decline of 7.2% represents its worse yr/yr decline in more than five years. However, its business is exhibiting more resilience than anticipated, illustrating the strength of its brand and its solid execution on the cost side.
Dick's Sporting Goods displays some inconsistency today despite delivering upbeat AprQ results (DKS)
Dick's Sporting Goods (DKS -1%) has had its ups and downs today despite registering upbeat Q1 (Apr) results. The leading sporting goods retailer in the U.S. also delivered same-store sales growth ahead of its FY24 (Jan) outlook, fueled by a modest jump in transactions and a higher average ticket. DKS also reiterated its FY24 financial targets.
Still, with the stock tumbling roughly 17% since late April highs, today's lukewarm response may not feel like a win. Investors likely remained concerned over future consumer discretionary spending given the stubborn inflationary environment. Also, with schools letting out for the summer, team sports take a bit of a rest, with consumers possibly holding off on purchasing new gear and equipment until the back-to-school season in Q3 (Oct). Meanwhile, the threat to future sales growth from DKS's brand partners focusing on their direct-to-consumer models looms.
Nevertheless, DKS's Q1 results underscored healthy demand, a sigh of relief after Foot Locker (FL) sounded the alarm regarding footwear demand with its discouraging AprQ report last week.
- DKS delivered adjusted EPS of $3.40, a 19% jump yr/yr and nicely ahead of consensus. Revs of $2.84 bln, a 5% improvement, also exceeded analyst expectations. Meanwhile, comp growth of +3.4% tracked ahead of DKS's flat to +2% forecast for the year. Management noted that footwear, team sports, and apparel exhibited relative strength in the quarter, while some COVID categories, like bikes and golf, remained well above 2019 levels despite retrenching from pandemic highs.
- Footwear is a crucial pillar of DKS's merchandising strategy, evidenced by its reformatted stores boasting massive "shoe walls," where everything outside of cleats, which have their own section, are shelved against the entire back wall of the store. Therefore, hearing this strategy translate to solid footwear sales was encouraging, especially after FL's troubling AprQ report.
- Regarding reformatted locations, DKS is updating its locations across the U.S., emphasizing giving consumers an in-store experience. The company is on track to open nine "House of Sports" locations, which contain sections dedicated to certain sports, rock walls, batting cages, and indoor ice rinks, ahead of the back-to-school season, targeting 75-100 updated sites by 2027. DKS is also redesigning its traditional (smaller) stores, giving them a lite "House of Sports" treatment, opening its first last week in Indiana.
- The near-term remains uncertain, however, resulting in management only reiterating its FY24 outlook despite the outperformance in Q1. DKS continues to expect adjusted EPS of $12.90-13.80 and comps of flat to positive +2%.
Overall, despite it not being reflected in today's price action, DKS delivered an uplifting Q1 report, particularly given the red flags FL raised with its slashed FY24 outlook last week. Despite potential headwinds on the horizon, we view DKS as an attractive long-term play, given its dominance in the sporting goods world. Also, with DKS focusing on turning its stores into experiences, consumers may opt to head into one of its locations as they can try out different golf clubs, running shoes, or softball bats, which tends to translate into more frequent purchases.
Lowe's cuts outlook just as Home Depot did, but upside Q1 results and Pro gains set it apart (LOW)
After rival Home Depot (HD) issued disappointing quarterly results last week that included a top line miss and FY24 guidance cut, a lackluster earnings report from Lowe's (LOW) was widely anticipated. While the results were not spectacular, LOW did beat EPS estimates by a wide margin, and, unlike HD, it also exceeded the muted revenue expectations.
Citing the same set of headwinds as HD, such as collapsing lumber prices, unfavorable weather on the west coast, and softening consumer demand for discretionary purchases, LOW followed suit and also lowered its FY24 outlook.
The home improvement retailer now expects FY24 EPS of $13.20-$13.60 (from $13.60-$13.80), total revenue of $87-$89 bln (from $88-$90 bln), and comps of -2% to -4% (from flat to -2%).
Heading into LOW's earnings report, we were concerned that the company's higher mix of DIY sales, which account for about 75% of its business, would weigh on its results and outlook.
- In the earnings press release, LOW did call out lower DIY discretionary sales as one of the primary headwinds, causing comps to come in at -4.3%. Also, relative to HD, it does appear that LOW's heavier reliance on the DIY customer is indeed working against it.
- On the surface, LOW's FY24 comp guidance of -2% to -4% looks slightly better than HD's forecast of -2% to -5%. However, it's important to note that LOW is lapping an easier comp from FY23 when U.S. comps declined by 0.4%. In comparison, HD's U.S. comps were considerably better than LOW in FY23, up by 2.9%.
Importantly, though, LOW continues to make gains on the Pro side of the business, seemingly taking more market share from HD.
- CEO Marvin Ellison noted in the earnings press release that Pro comparable sales were positive for Q1, although it seems that LOW's streak of double-digit growth for Pro came to a halt. Prior to this quarter, the company generated double-digit growth in Pro for eleven consecutive quarters.
- Interestingly, HD stated during its Q1 earnings call that DIY outperformed Pro, but both businesses were negative for the quarter. The company added that the types of home improvement projects are changing from large-scale remodels to smaller projects, explaining why its average ticket increased by just 0.2% compared to increases of 5.8% in Q4 and 8.8% in Q3.
LOW's progress in Pro, combined with its better-than-expected Q1 results against low expectations, helps explain why the stock is moving higher despite the guidance cut and cautious commentary regarding consumer spending.
AutoZone not in the zone today as rare top line miss drags shares lower
AutoZone (AZO -5.2%) is not in the zone today. The automotive parts retailer is pulling back today after reporting Q3 (May) results this morning. AZO posted its typical large EPS beat, however, it missed on revenue which is quite rare for AZO. The company had posted 12 consecutive top line beats, so this result was pretty surprising for investors.
- Domestic same store comps in Q3 were disappointing as well at just +1.9%, which was below street estimates. It was also a good bit below Q2 domestic comps of +5.3% and that was despite AZO lapping robust +13.8% comps in the prior Q2 period.
- As we mentioned in our preview, Q3 is always interesting because it's tax refund season. AZO has said previously that tax refunds historically drive enormous demand in the automotive parts category. But based on the fairly weak comps and top line miss, it seems that tailwind may not have been as strong as usual.
- We also noted in our preview that other retailers have mentioned on their calls in recent days that tax refunds were smaller this year. Perhaps that impacted AZO's Q3 results. Also, there was a reduction in SNAP benefits as emergency pandemic allotments enacted by Congress expire. AZO did not cite these issues in the press release, but it has been a theme among other retailers.
- We did not get a lot of detail in the press release, but AZO mentioned that weaker than expected sales for the month of March meaningfully affected its Q3 results. That also is pretty consistent with what we heard from retailers like WMT and TGT, which both cited March as being a weak month. This coincides with the deterioration in consumer confidence reflecting recent events such as the banking crisis that emerged in March.
Overall, the stock is quite a bit lower today following the Q3 report. We think the rare top line miss was pretty shocking for investors to see and explains why the stock is down a good amount. The comps were pretty tepid as well. Also, we think AZO's report was a bit of a letdown in comparison to strong Q1 results from peer O'Reilly Auto (ORLY), which boasted +10.8% comps and beat nicely on revenue. And ORLY's Q1 report included March, so it was likely facing similar headwinds.
Zoom Video struggles to connect with investors despite registering a solid beat-and-raise in Q1 (ZM)
Zoom Video (ZM -6%) is not connecting well with investors today despite delivering a solid beat-and-raise in Q1 (Apr). The video conferencing service provider also continued to display signs of stabilization after an arduous past couple of years, with online average monthly churn declining to 3.1% from 3.4% last quarter and 3.6% in the year-ago period.
A few items are driving investors' negative response today. For one, ZM expects its primary Online business (42% of Q1 revs) to remain flat for the rest of the year after a minor bump in Q2 (Jul). Also, even though ZM expanded its non-GAAP gross margins 190 bps yr/yr to 80.5%, exceeding its FY24 (Jan) target of 79.5%, ZM kept its full-year projection unchanged due to additional investments in AI technologies. Meanwhile, ZM experienced some distractions across the global sales team following its 15% headcount reduction earlier this year and subsequent sales reorganization, partially driving the 8% and 5% sales decline across the EMEA and APAC regions, respectively. FX headwinds also remain a sticky issue.
- ZM still delivered plenty of highlights in Q1. The company topped its adjusted EPS estimate of $0.96-0.98 handily, expanding its bottom line by 13% yr/yr to $1.16. Likewise, ZM exceeded its revenue forecast, posting growth of 2.9% yr/yr to $1.11 bln.
- Enterprise customers totaled 215,900 by the end of the quarter, a 9% improvement yr/yr, comprising 57% of total revs, up from 52% in 1Q23. Customers contributing over $100K in TTM revenue grew by 23% yr/yr to 3,580, representing 29% of revs, an improvement from 24% last year.
- AI was a focal point of ZM's earnings call, with management discussing the benefits of ZoomIQ, which leverages AI to compose emails and summarize long chat threads. ZM also updated investors on its Anthropic investment last week, noting it will start integrating Anthropic's AI assistant into its Contact Center portfolio.
- Looking ahead, ZM raised its FY24 targets, projecting EPS of $4.25-4.31, up from $4.11-4.18, and revs of $4.465-4.485 bln, up from $4.435-4.455 bln. Less upbeat was management's color regarding its Online business, expecting revs of around $480 mln in Q2, a 1% increase from the $473 mln delivered in Q1, remaining flat after that in FY24.
After the second straight quarter of investors expressing their dissatisfaction surrounding ZM's otherwise decent earnings results, the company may remain stuck in its sideways trading pattern for an extended length. ZM's valuation of 16x forward earnings is reasonable, representing a slight premium compared to Cisco (CSCO) at 12x. The company is also improving its key metrics while deploying AI features across its services, which could be a selling point for some enterprises on the fence.
However, sales growth remains light, while competitive risks continue to cause concern as Microsoft (MSFT) and CSCO boast more commanding presences, being able to bundle services, a plus when selling to larger customers. At the same time, smaller players like TeamViewer and 247meeting can offer similar features as ZM's core offerings, which may be more appealing to smaller customers.
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