Market Snapshot
| Dow | 38441.54 | -411.32 | (-1.06%) | | Nasdaq | 16920.59 | -99.30 | (-0.58%) | | SP 500 | 5266.95 | -39.09 | (-0.74%) | | 10-yr Note | -5/32 | 4.62 |
|
| | NYSE | Adv 449 | Dec 2315 | Vol 876 mln | | Nasdaq | Adv 1113 | Dec 3113 | Vol 6.7 bln |
Industry Watch
| Strong: -- |
| | Weak: Energy, Utilities, Health Care, Real Estate, Industrials, Financials, Materials |
Moving the Market
-- Rising market rates keeping pressure on equities
-- Profit-taking activity after another record high close for the Nasdaq
-- Broad based selling
-- Rollover action in some heavily-weighted names just before the close, leading major indices to close near lows of the day |
Closing Summary
29-May-24 16:25 ET
Dow -411.32 at 38441.54, Nasdaq -99.30 at 16920.59, S&P -39.09 at 5266.95
[BRIEFING.COM] Today's trade featured a negative bias. Broad selling activity had the major indices in negative territory through the entire session. Ultimately, the indices settled near their lows of the session after selling increased in some heavily-weighted names that had been trading higher, acting as a limiting factor for index-level losses.
Amazon.com (AMZN 182.02, -0.13, -0.1%), Microsoft (MSFT 429.17, -1.15, -0.3%), and Alphabet (GOOG 177.40, -0.62, -0.4%) were among the standouts in that respect. AMZN had been up as much as 1.1% today, MSFT was up 0.11% at its high, and GOOG showed a 0.14% gain at its best level.
The broad retreat today left all 11 S&P 500 sectors with losses. The energy sector was among the top laggards, dropping 1.8%, amid falling commodity prices. WTI crude oil futures fell 0.8% to $79.25/bbl and natural gas futures slid 5.7% to $2.66/mmbtu.
Sector component Marathon Oil (MRO 28.68, +2.23, +8.4%) went against the grain, jumping more than 8% after news that ConocoPhillips (COP 115.25, -3.71, -3.1%) will acquire MRO in an all-stock transaction.
The industrial sector was the next worst performer, dropping 1.4%. Weak airline components weighed on the sector after American Airlines (AAL 11.62, -1.82, -13.5%) lowered its Q2 EPS below consensus and lowered its adjusted operating margin and TRASM guidance.
The overall downside bias was driven by some normal consolidation activity after a big run recently. With today's losses, the S&P 500 is still 4.6% higher this month and the Nasdaq Composite is 8.1% higher since the start of May.
The price action in Treasuries also contributed to the downside bias in equities. The 10-yr note yield rose eight basis points to 4.62% and the 2-yr note yield settled unchanged at 4.98%. Yields were already moving higher, but today's $44 billion 7-yr Treasury note sale, which met weak demand following this week's poor slate of note offerings, sparked increased selling action.
Today's economic data was limited to the weekly MBA Mortgage Applications Index, which declined 5.7% with refinance applications plunging 14% and purchase applications dropping 1%. Market participants also received the Fed's latest Beige Book, which said national economic activity continued to expand from early April to mid-May, but the release didn't garner outsized reactions from bonds or equities.
- Nasdaq Composite: +12.7% YTD
- S&P 500:+10.4% YTD
- S&P Midcap 400: +5.0% YTD
- Dow Jones Industrial Average: +2.0% YTD
- Russell 2000: +0.5% YTD
Looking ahead, Thursday's economic calendar features:
- 8:30 ET: Q1 GDP -- second estimate (Briefing.com consensus 1.3%; prior 1.6%), Q1 GDP Deflator -- second estimate (Briefing.com consensus 3.1%; prior 3.1%), Weekly Initial Claims (Briefing.com consensus 219,000; prior 215,000), Continuing Claims (prior 1.794 mln), advance April goods trade balance (prior -$91.8 bln), advance April Retail Inventories (prior 0.3%), and advance April Wholesale Inventories (prior -0.4%)
- 10:00 ET: April Pending Home Sales (Briefing.com consensus -0.5%; prior 3.4%)
- 10:30 ET: Weekly natural gas inventories (prior +78 bcf)
- 11:00 ET: Weekly crude oil inventories (prior +1.83 mln)
Mega caps power late move higher
29-May-24 15:30 ET
Dow -349.56 at 38503.30, Nasdaq -55.91 at 16963.98, S&P -28.70 at 5277.34
[BRIEFING.COM] The major indices moved slightly higher over the last half hour, coinciding with some mega caps trading higher. The Vanguard Mega Cap Growth ETF (MGK) is up 0.1%.
Names that report earnings this afternoon and ahead of tomorrow's open trade in mixed fashion. Dow component Salesforce (CRM 271.43, +1.60, +0.6%) trades higher and reports earnings after the close. HP Inc. (HPQ 33.16, +0.02, +0.1%), American Eagle Outfitters (AEO 24.04, +0.13, +0.5%), Pure Storage (PSTG 62.70, +0.18, +0.3%), and Okta (OKTA 96.67, +0.52, +0.5%) are also among the notable names trading higher in front of their earnings reports after the close.
Meanwhile, Dollar General (DG 140.12, -2.15, -1.5%), Best Buy (BBY 72.5, -0.49, -0.7%), Hormel Foods (HRL 34.07, -0.62, -1.8%), Foot Locker (FL 22.67, -0.35, -1.5%) are trading lower today and report earnings ahead of tomorrow's open.
GOOG, MSFT slide below prior closing levels, coinciding with index decline
29-May-24 15:00 ET
Dow -398.32 at 38454.54, Nasdaq -75.56 at 16944.33, S&P -34.91 at 5271.13
[BRIEFING.COM] The market is in a slow drift lower following the release of the Fed's Beige Book.
The S&P 500 is trading down 0.7% and the equal-weighted S&P 500 is down 1.2%.
Downside moves also coincided with some mega caps giving back gains, including Alphabet (GOOG 177.46, -0.55, -0.3%), which was up as much as 0.11% earlier, and Microsoft (MSFT 429.60, -0.72, -0.2%), which was up as much as 0.14% earlier.
Beige Book shows economic activity continued to expand; outlooks grew somewhat more pessimistic
29-May-24 14:30 ET
Dow -380.53 at 38472.33, Nasdaq -49.11 at 16970.78, S&P -29.42 at 5276.62
[BRIEFING.COM] The broader market didn't move much after the release of the Fed's latest Beige Book which said national economic activity continued to expand from early April to mid-May. Currently, the S&P 500 (-0.55%) is in second place among the major averages.
Other points of interest from the report included: Employment rose at a slight pace overall. Eight Districts reported negligible to modest job gains, and the remaining four Districts reported no changes in employment. Wage growth remained mostly moderate, though some Districts reported more modest increases. Several Districts reported that wage growth was at pre-pandemic historical averages or was normalizing toward those rates.
Prices increased at a modest pace over the reporting period. Contacts in most Districts noted consumers pushed back against additional price increases, which led to smaller profit margins as input prices rose on average. Price growth is expected to continue at a modest pace in the near term.
Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks.
Gold pressured by rising dollar, yields ahead of Beige Book
29-May-24 13:55 ET
Dow -366.37 at 38486.49, Nasdaq -56.58 at 16963.31, S&P -29.95 at 5276.09
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.33%) is is shallowest laggard among the major averages on Wednesday afternoon, all three having bumped a hair higher as we approach the top of the hour; as a reminder, the Fed's May Beige Book is due out in about five minutes.
Gold futures settled $15.30 lower (-0.7%) to $2,341.20/oz, pressured in part by rising bond yields and a stronger dollar.
Meanwhile, the U.S. Dollar Index is up about +0.4% to $105.06.
ConocoPhillips next up to make major M&A move in the oil patch by acquiring Marathon Oil (COP)
After Exxon Mobil (XOM) and Chevron (CVX) struck huge deals, acquiring Pioneer Natural Resources (PXD) and Hess (HES), respectively, it was ConocoPhillips (COP) turn to make a big splash in the oil patch. This morning, COP announced its intention to acquire Marathon Oil (MRO) in an all-stock transaction valued at $22.5 bln, inclusive of $5.4 bln in net debt. The blockbuster deal represents the latest big bet that demand for oil and gas isn't going to evaporate anytime soon as energy companies continue to capitalize on the massive cash flows generated over the past few years.
- Reflecting the risks of financing this transaction through new stock, shares of COP are trading sharply lower on the news. MRO shareholders will receive 0.225 shares of COP common stock for each share of MRO, equating to a 14.7% premium to yesterday's closing price for MRO. That full premium isn't being priced into MRO shares today, though, due to uncertainties whether this acquisition will be cleared by regulators.
- However, it's notable that on May 2, the U.S. Federal Trade Commission (FTC) did conditionally approve the merger between XOM and PXD. That condition was that PXD co-founder Scott Sheffield, who the FTC alleges colluded with OPEC to boost oil prices, must be excluded from the new company's Board of Directors. Mr. Sheffield is fighting back against those allegations, asking that the FTC remove this stipulation, but the deal between XOM and PXD has been allowed to go through. That approval should provide COP and MRO with some leverage as it argues for the merits of its merger.
- For COP, those merits include an immediately accretive transaction that it expects will add to its earnings, cash flow from operations, and free cash flow. Those gains will mainly be achieved through $500 mln in cost savings and capital synergies within the first year following the closing, driven by reduced SG&A costs and improved capital efficiencies.
- Additionally, to mitigate the impact of financing this transaction with equity, COP plans to repurchase over $7.0 bln in shares in the first year, up from its previous expectation of over $5.0 bln as a standalone company.
- From a strategic standpoint, the addition of MRO will bolster COP's assets in the Eagle Ford and Bakken shale basins in North Dakota. MRO's total production in Q1 was 189,000 net bop/d. For some context, in Q1, COP's "lower 48" production totaled 1.046 million boe/d, with Permian Basin production averaging 736,000 boe/d, Eagle Ford producing 176,000 boe/d, and Bakken Shale contributing 96,000 boe/d.
Lastly, COP seems to be paying a reasonable price for MRO. Based on MRO's FY23 adjusted net income of $1.58 bln, COP is paying roughly 14x last year's earnings for the company. Overall, this move will help COP keep pace with XOM and CVX as the oil and gas industry continues to consolidate.
Chewy spikes to 2024 highs after Q1 results underscore favorable turnaround dynamics (CHWY)
Chewy (CHWY +27%) shares cannot be tamed today as they surge to nearly six-month highs, breaking free from a lengthy consolidation pattern that dominated much of 2024. Investors applaud the online pet retailer's impressive earnings beat in Q1 (Apr), supported by decent sales growth. While CHWY did project Q2 (Jul) revs below consensus, it reiterated its FY24 outlook, signaling a more robust second half of the year. Accompanying the uplifting headline numbers were several encouraging developments, internally and externally, as well as CHWY's new $500 mln repurchase program, representing roughly 5% of its market cap.
- CHWY's Q1 revenue growth of 3.1% yr/yr to $2.88 bln easily surpassed its $2.84-2.86 bln outlook. Management attributed the outperformance to two underlying factors, including sustained loyalty in its non-discretionary categories (consumables), comprising around 85% of its total sales, and Autoship customer sales of $2.2 bln, a 6.4% jump yr/yr, outpacing overall growth.
- CHWY also noticed favorable customer trends in the quarter. The company has been focusing on personalization while sharpening its value proposition, i.e., customer service, quality goods, and quick delivery, many attributes helping pull customers from other e-commerce platforms, such as Amazon (AMZN), and physical retailers like Walmart (WMT). As a result, CHWY enjoyed positive net new and reactivated customer growth versus the year-ago period.
- For the first time in two years, CHYW's new customer acquisition and reactivations exceeded its expectations in the quarter, albeit moderately.
- Also, CHWY launched its paid membership program Chewy Plus earlier this month, which may drive further customer growth and generate meaningful cash flows, partly providing the company's confidence in announcing its $500 mln buyback plan.
- Gross margins were impressive in the quarter, expanding by 130 bps yr/yr to 29.7%. This was aided by growing momentum in CHWY's sponsored ads business, a mix shift into healthcare, and a more normalized promotional environment. CHWY's sponsored ads business continues to ramp well, reiterating its long-term target of scaling to around 1-3% of net sales with attractive flow through to net earnings.
- Looking ahead, CHWY expects a minor sequential sales dip in Q2, with a target of $2.84-2.86 bln. However, for FY25, the company reaffirmed its $11.6-11.8 bln outlook. Management observed healthy growth rates in pet adoption on a yr/yr basis, with a positive balance between adoption and relinquishment for the first time since 2022.
- Additionally, while it is still too early to declare an industry turnaround, CHWY is confident that the pet industry remains on track toward globalization, supporting a reacceleration of sales growth, especially as it continues to improve its Canadian business.
The main takeaway from Q1 was that CHWY is amid turnaround dynamics. Perhaps the most compelling development the company touched on today was that it is not seeing any further deterioration in the discretionary environment, a trend that held back previous quarterly results. As such, investors are expressing excitement over the possibility that after hitting all-time lows last month, CHWY shares are finally ready to reclaim lost ground.
CAVA Group heads lower despite Q1 upside; lapping robust results hurt comps (CAVA)
CAVA Group (CAVA -1.4%) is lower following its Q1 report last night, but has rebounded off its lows. This Mediterranean fast-casual restaurant chain reported its largest EPS beat in the last three quarters. Revenue rose a healthy 27.5% yr/yr to $259 mln, which also was nicely ahead of analyst expectations. CAVA also increased FY24 adjusted EBITDA guidance pretty substantially to $100-105 mln from $86-92 mln.
- Same restaurant comps in Q1 came in at +2.3%. Following a +11.4% comp number in Q4 and +17.9% comps for all of 2023, we think the Q1 comp perhaps surprised investors on the low side. In fairness to CAVA, it was lapping a huge +28.5% comp last year when there was a lot of buzz around the brand as it was preparing for its IPO debut in June 2023.
- Breaking down the +2.3% comp a bit further, it was driven by a +3.5% increase from menu price/mix, partially offset by a decline in traffic of -1.2%. Investors never like to see traffic declines, but again CAVA was lapping the IPO buzz from last year. The best news in terms of comps was CAVA increasing its FY24 comp guidance to +4.5-6.5% from +3-5%. That tells us that CAVA's Q1 comps were perhaps better than internal expectations.
- Looking ahead, CAVA said its new annual comp guidance implies a mid to high single-digit comp for the remainder of the year. Additionally, CAVA said its comp guidance raise was fueled by the current strength it is seeing, the expected mix impact from launching steak nationally in June, partially offset potential traffic headwinds as CAVA anniversaries the IPO buzz in the summer of 2023.
- CAVA is excited about its June 3 steak launch. CAVA has been testing steak in its Boston and Dallas since early December. CAVA noted that grilled steak complements its existing mains, fills a perceived gap on the menu, and enhances its dinner occasion, which now makes up 46% of sales. Steak will be seasoned with bold flavors like sundried tomato, herby oregano and a touch of Aleppo pepper. CAVA expects steak to provide a tailwind to comps.
- The company opened 14 net new restaurants during Q1, plus five more thus far in Q2. In April, CAVA opened its first restaurant in Chicago, marking its entry into the upper Midwest. Of note, CAVA increased its FY24 net new restaurant openings guidance to 50-54 from 48-52. That is good growth after ending 2023 at 309 locations.
Why is the stock down? We think it's a combination of factors, including some disappointment around comps. The traffic decline in particular might be spooking investors. We counter that CAVA was lapping unusual huge comps last year. Also, it raised full year comp guidance, which implies Q1 upside. We also think CAVA has been benefitting from a "halo" effect as the stock has been a big mover since its IPO. As such, any perceived weakness leads to a pullback.
Looking ahead, CAVA's goal is to create the next large scale cultural cuisine category. CAVA has a strong Millennial and a growing Gen Z contingent. CAVA also believes it's in the early stages of fulfilling its total restaurant potential. CAVA believes there is opportunity for more than 1,000 CAVA restaurants in the US by 2032 vs ending 2023 with 309 locations. Its acquisition of Zoes Kitchen in 2018 allowed CAVA to rapidly expand, all have been converted to the CAVA brand.
American Airlines on lower flight path than peers as guidance cut reveals market share losses (AAL)
Travel demand is seemingly holding up very well as the busy summer season gets underway, but American Airlines (AAL) still cut its Q2 EPS, adjusted operating margin, and TRASM guidance last night, sending shares spiraling lower. Adding salt to the wound, the reduced outlook came on the same day that the TSA reported that Friday, May 24, set a new record for the most screened travelers in a single day. Furthermore, this May has included five of the busiest ten days in U.S. aviation history.
- As if to reassure its investors that it's not experiencing the same turbulence, rival United Airlines (UAL) quickly reaffirmed its Q2 EPS guidance of $3.75-$4.25 following AAL's discouraging update.
- In the SEC filing, AAL didn't provide any details regarding the causes behind its reduced outlook, leaving some to wonder if the headwinds are industry wide. However, this morning, the company offered more color during the Berstein Annual Strategic Decisions Conference.
- Specifically, AAL stated that it's seeing softness in bookings and that the domestic supply and demand imbalance has led to a weaker domestic pricing environment. It's evident, though, that AAL is being squeezed harder by these pressures than its competitors.
- Rewinding to when AAL reported Q1 earnings on April 25, the company missed EPS expectations with unit revenue decreasing by 4.9% yr/yr, compared to a 0.6% increase for UAL and a 1% increase for Delta Air Lines (DAL). AAL acknowledged that its network was uniquely impacted by industry capacity in Q1.
The question, then, is why is AAL underperforming relative to its peers?
- Another item that stood out last quarter was that AAL's international revenue growth of 4.3% significantly lagged behind the 12% and 16% growth for DAL and UAL, respectively. International flights are generally more profitable than domestic flights and part of AAL's strategy has been to expand its network within the U.S., especially in the south and southeastern markets.
- Furthermore, AAL has been more aggressive in terms of cutting costs, including trimming its workforce on the sales side. This is reflected in its CASM-ex metric, which was up 2.3% in Q1, compared to UAL's increase of 4.7%. For Q2, AAL now sees CASM-ex of flat to +1%, compared to its prior guidance of +1% to +3%.
- A shift in strategy seems to be on the horizon, though. AAL also announced last night that Vasu Raja, the company's Chief Commercial Officer, is departing in June 2024 and that Vice Chair and Chief Strategy Officer Stephen Johnson will assume leadership of the commercial organization until a new Chief Commercial Officer is hired. Reclaiming lost market share against UAL and DAL will be a key objective for the next Chief Commercial Officer and that will require winning more corporate business deals.
The main takeaway is that AAL's guidance cut is more a reflection of some sales execution issues on its side, especially in the international business, rather than a more broad-based downturn in travel demand.
Dick's Sporting Goods hits another homerun with a solid beat-and-raise in Q1 (DKS)
Higher price tags are not deterring consumers from flocking into Dick's Sporting Goods (DKS +16%), as the sporting goods retailer boasted meaningful top and bottom-line upside in Q1 (Apr) on solid growth in transactions and average ticket. DKS also hiked its FY25 (Jan) earnings, revenue, and comp guidance, underpinning improving momentum as it progresses through the year.
DKS has consistently been a winner this year after surviving excessive inventory woes and a corresponding jump in promotional activity in 2023. Its ongoing store remodels, opting for larger footprints focusing on experiences, including rock climbing walls and batting cages, has continuously proved the right move; management stated it continued to capture additional market share in Q1.
- With DKS attracting more customers into its stores, it remained poised to deliver another quarter of solid numbers, registering adjusted EPS of $3.30, its third straight quarter of double-digit upside, revs of $3.02 bln, a 6.2% improvement yr/yr, and same-store sales growth of +5.3%, an acceleration from last quarter. Categories exhibiting pronounced growth were footwear, athletic apparel, and hardlines.
- EBIT margins remained sound, compressing by just 21 bps yr/yr to 11.3%. The minor dip versus last year reflected a higher yr/yr shrink, which weighed on merchandise margins. However, DKS warned of higher shrink in the quarter back in March, so investors were prepared for the mild uptick. Furthermore, DKS remarked today that shrink edged higher by less than originally expected.
- As a result, DKS increased its EBIT margin forecast for FY25, projecting moderate expansion yr/yr at 11.1% compared to 10.9%, or flat yr/yr. The company also increased its other forecasts for the year, expecting adjusted EPS of $13.35-13.75, up $0.50 from its previous outlook (more than the size of its Q1 beat), revs of $13.1-13.2 bln, up slightly from $13.0-13.13 bln, and comps of +2-3%, up a point from its prior guidance of +1-2%.
- DKS also remains on track to open 6 more House of Sport locations this year as well as 14 additional next-gen (half the size of House of Sport) stores. Despite operating in an increasingly digital retail environment, DKS is not backtracking on its ambitions to control the physical retail landscape. Given how consumers tend to enjoy trialing and seeing sporting goods in person, DKS's strategy may continue to produce profitable growth, especially over the long term.
By delivering upbeat results, supported by positive transaction growth, reflecting higher traffic despite increased average ticket growth, DKS continues to demonstrate its competitive advantage in the sporting goods industry. In an economy where consumer purchasing power is diminished due to the cumulative effects of inflation, DKS proves that customers have not lost their ability to spend. Instead, they prioritize where their squeezed dollars are allocated, as evidenced by many of DKS's competitors, including Academy Sports + Outdoors (ASO) and Hibbett (HIBB), underperforming this year.
|
