| | | Market Snapshot
| Dow | 39127.14 | -43.10 | (-0.11%) | | Nasdaq | 16277.46 | +37.01 | (0.23%) | | SP 500 | 5211.49 | +5.68 | (0.11%) | | 10-yr Note | 0/32 | 4.36 |
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| | NYSE | Adv 1625 | Dec 1131 | Vol 939 mln | | Nasdaq | Adv 2351 | Dec 1896 | Vol 5.1 bln |
Industry Watch
| Strong: Communication Services, Industrials, Materials, Energy, Consumer Discretionary |
| | Weak: Consumer Staples, Utilities, Health Care, Financials |
Moving the Market
-- Buy-the-dip after soft start to the week
-- Gains in some heavily-weighted names providing support to broader market
-- Favorable reaction to softer than expected March ISM Services PMI
-- Treasuries moving off intraday high yields in response to PMI data
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Closing Summary
03-Apr-24 16:30 ET
Dow -43.10 at 39127.14, Nasdaq +37.01 at 16277.46, S&P +5.68 at 5211.49
[BRIEFING.COM] Today's trade featured mostly positive price action after a soft start to the day. Buying activity picked up at 10:00 ET after the release of a softer than expected ISM Services PMI for March. The major indices closed off session highs, though, after some heavily-weighted names retreated in front of the close.
Microsoft (MSFT 420.45, -0.99, -0.2%), which had been up as much as 0.4%, and NVIDIA (NVDA 889.64, -4.88, -0.6%), which had been up as much as 1.0%, were influential names that turned lower in the final hour of trading.
Today's positive bias was also supported by a buy-the-dip mentality following a weak start to the week. The recent negative price action was in response to the jump in market rates as participants recalibrated rate cut expectations amid ongoing strength in economic data and sticky inflation numbers. Treasuries also reacted favorably to this morning's soft data, though, which also contributed to the upside bias.
The 10-yr note yield reached 4.42% before the data, but settled at 4.36%, which is one basis point lower than yesterday. The 2-yr note yield hit 4.73% earlier, but settled at 4.68% now, which is down two basis points from yesterday.
Some relative strength in the semiconductor space also contributed to today's bias. The PHLX Semiconductor Index (SOX) climbed 0.3%. Intel (INTC 40.33, -3.61, -8.2%) was a notable exception after outlining a new financial reporting structure to reflect the transition to a foundry operating model, which showed operating losses are expected to peak in 2024.
Four of the S&P 500 sectors closed with declines while seven settled higher. The energy sector was among the outperformers, rising alongside oil prices. WTI crude oil futures extended recent gains ($85.44/bbl, +0.26, +0.3%) that have been predicated on increased geopolitical tensions in the Middle East.
- S&P 500:+9.3% YTD
- Nasdaq Composite: +8.4% YTD
- S&P Midcap 400: +7.7% YTD
- Dow Jones Industrial Average: +3.8% YTD
- Russell 2000: +2.4% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Applications Index -0.6%; Prior -0.7%
- March ADP Employment Change 184K (Briefing.com consensus 150K); Prior was revised to 155K from 140K
- March S&P Global US Services PMI - Final 51.7; Prior 52.3
- March ISM Non-Manufacturing PMI 51.4% (Briefing.com consensus 52.6%); Prior 52.6%
- The key takeaway from the report is the recognition that the expansion in the services sector -- the largest swath of the U.S. economy -- slowed in March, substantiated by a slowdown in the pace of increase in prices and new orders.
Thursday's economic calendar features:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 214,000; prior 210,000), Continuing Claims (prior 1.819 mln), and February Trade Balance (Briefing.com consensus -$66.0 bln; prior -$67.4 bln)
- 10:30 ET: Weekly natural gas inventories (prior -36 bcf)
NVDA, MSFT, GOOG turn lower, weighing on broader market
03-Apr-24 15:35 ET
Dow -48.56 at 39121.68, Nasdaq +28.46 at 16268.91, S&P +4.63 at 5210.44
[BRIEFING.COM] The market moved lower ahead of the close.
The deterioration, which led the S&P 500 to slip below its prior closing level, coincided with some heavily-weighted stocks giving back early gains. Alphabet (GOOG 155.70, -0.18, -0.1%), which had been up as much as 0.3%, Microsoft (MSFT 420.80, -0.69, -0.2%), which had been up as much as 0.4%, and NVIDIA (NVDA 890.90, -3.69, -0.4%), which had been up as much as 1.0%, are losing standouts in that respect.
Market breadth still reflects an underlying positive bias, though. Advancers lead decliners by a 4-to-3 margin at the NYSE and by an 11-to-10 margin at the Nasdaq.
10-yr yield decline; mega cap stocks outperform
03-Apr-24 15:00 ET
Dow -10.56 at 39159.68, Nasdaq +62.33 at 16302.78, S&P +11.62 at 5217.43
[BRIEFING.COM] The S&P 500 (+0.2%) and Nasdaq Composite (+0.4%) moved mostly sideways in recent action while the Dow Jones Industrial Average (-0.1%) slide below its prior closing level.
Mega cap continues to support index level gains. The Vanguard Mega Cap Growth ETF (MGK) is up 0.3%. Meanwhile, the equal weighted S&P 500 trades close to its prior close.
Separately, the 10-yr note yield is down two basis points to 4.35%.
General Electric recoups post-split losses, Bath & Body Works lags in S&P 500
03-Apr-24 14:30 ET
Dow +9.90 at 39180.14, Nasdaq +80.43 at 16320.88, S&P +15.43 at 5221.24
[BRIEFING.COM] The S&P 500 +0.30%) is once again in second place among the major averages, hosting gains just above 15 points.
Elsewhere, S&P 500 constituents General Electric (GE 145.89, +9.42, +6.90%), NRG Energy (NRG 72.33, +3.73, +5.44%), and Micron (MU 127.56, +4.81, +3.92%) pepper the top of today's trading. GE recoups all and then some of yesterday's split-related losses, NRG announced planned repurchase of certain 2.75% convertible senior notes, while MU mirrors broader strength in technology.
Meanwhile, Bath & Body Works (BBWI 46.75, -1.50, -3.11%) underperforms, continuing to slide after yesterday's -3.9% showing.
Gold undeterred in ongoing rally to all-time highs
03-Apr-24 14:00 ET
Dow +51.11 at 39221.35, Nasdaq +79.34 at 16319.79, S&P +18.11 at 5223.92
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (+0.49%) is still in the lead, up about 80 points.
Gold futures settled $33.20 higher (+1.5%) to $2,315.00/oz, seemingly undeterred in its rally to another all-time high; dollar weakness and continued tensions in the Middle East have allowed the yellow metal to surge these past few days.
Meanwhile, the U.S. Dollar Index is down about -0.5% to $104.27.
Ulta Beauty plunges following discouraging Q1 guidance; ripple effect on beauty industry (ULTA)
Ulta Beauty (ULTA -14%) wipes out its gains this year and heads toward gap fill from late November following its gloomy near-term outlook from a conference today. ULTA projected Q1 (Apr) comps to grow by low single digits yr/yr, landing at the low end of its 1H24 outlook and tracking below its FY24 target of +4-5%. By encountering its more bearish 1H24 scenario just a month after first outlining it, investors are worried that ULTA could trim its FY24 guidance, especially now that the second half of the year will need to pick up even more slack.
- What happened? ULTA already warned that the beauty category would endure moderating growth in FY24. However, thus far, through Q1, the category has slowed quicker than originally expected. This development is sending a shockwave throughout the cosmetics industry today, with peers e.l.f. Beauty (ELF), Coty (COTY), and Estee Lauder (EL) enduring pullbacks.
- A particularly discouraging trend is that both prestige and mass segments are moderating meaningfully compared to Q4 (Jan). Recall that the mass category, i.e., lower-priced labels, helped offset a more challenged prestige lineup during Q4. ULTA's mass segment was also an answer to increasing competitiveness in the prestige category. Management remarked that the current market softness is leading to a general step down across all price points.
- On a side note, given that ELF caters exclusively to the mass market, early moderation in the category is having a pronounced burden on its shares today.
- Additionally, Kohl's (KSS), which has been rolling out Sephora (LVMH) shops in its locations, is also seeing modest selling pressure today, likely due to further weakness in the prestige category, which comprises the bulk of Sephora's offerings.
- Intensifying competition was also an underlying factor in ULTA's guidance today, albeit to a minor degree, mainly since this has been in the background for several quarters. The company mentioned that it has never operated in an environment containing so many alternative routes, from physical locations like Walmart (WMT) and Macy's (M) to numerous online options. However, management was confident that its locations offer a unique consumer experience that should help guide it through increasing competition.
The beauty industry has been resilient throughout the past few years, powering ahead despite inflationary headwinds and general economic unease, making ULTA's near-term view all the more frustrating. A minor silver lining is that the slowdown is industry-wide and a result of problems associated with ULTA.
Bottom line, even though ULTA's Q4 results last month were mild, it touched on several uplifting trends, culminating in a healthy same-store sales growth forecast for the year. Unfortunately, after today's remarks, the highlight investors leaned on last month is losing its glow, sparking today's substantial drop.
Intel's transformation plan encounters more scrutiny as Foundry losses pile up (INTC)
When Pat Gelsinger returned to Intel (INTC) as CEO in 2021, he announced a major transformation initiative called "IDM 2.0" in which the chip maker would rededicate itself to technology leadership, while also transitioning to a foundry model. This massive undertaking and the tens of billions of dollars in investments that come with it was bound to create some serious financial setbacks, especially in the early stages, but Mr. Gelsinger has remained steadfast in his belief that the sacrifice will be worth it in the end.
- Last night, INTC took its next step in its transformation by outlining a new financial reporting structure that includes an Intel Foundry segment, but the main focus today rests on the recast financial results that INTC provided which depicted the struggles of that new segment.
- Specifically, in FY23, revenue for Intel Foundry dove by 31% to $18.9 bln, while its operating loss ballooned to ($6.96) bln from ($5.17) bln in FY22. The largest contributor to the operating loss was a decrease in product profit, driven by lower internal revenue -- or revenue derived from INTC. Revenue from external customers totaled $953 mln.
- Meanwhile, INTC continues to substantially ramp up its investments to build new manufacturing facilities to support the foundry business. As of December 30, 2023, capital investments classified as "construction in progress" totaled a whopping $43.4 bln, up from $36.7 bln at the end of 2022. Even with $8.5 bln in funding from the U.S. CHIPS and Science Act, INTC will ultimately sink nearly $100 bln in capital into the four U.S. facilities that it's constructing.
- Considering the huge operating losses currently afflicting the Foundry business, participants are likely questioning whether there will be a light at the end of the tunnel. On that note, it will likely get worse before it gets better as INTC stated that it expects losses to peak in 2024.
- Profitability isn't right around the corner, either, with INTC predicting breakeven operating margins midway between now and the end of 2030. In other words, it could be 2027 or later before the Foundry business turns a profit.
- By the end of 2030, the company is targeting 40% non-GAAP gross margin and 30% non-GAAP operating margin for Foundry, supported by a volume shift to leading-edge extreme ultraviolet (EUV) nodes. This shift will enable INTC to bring more of its production in-house, reducing its need to outsource silicon wafers from other manufacturers.
- A key positive is that there seems to be solid initial demand for INTC's Foundry business. The company disclosed that it has over $15 bln of lifetime deal value committed from external customers, which is up from the $10 bln figure it noted during its Q4 earnings call in January. However, INTC has a very long way to go to catch up to Taiwan Semiconductor Manufacturing (TSM), which generated revenue of $69.4 bln in 2023 alone.
The main takeaway is that the financials for Foundry were expected to be rough in these initial years, but the losses are even worse than many had anticipated. Last night's disclosures illustrated that this transformation is still only in the early-to-middle innings, providing a reality check that INTC's financial performance will likely remain volatile for quite some time.
Acuity Brands posting nice gain following Q2 EPS upside; AYI is back to typical lead times
Acuity Brands (AYI +4%) is not exactly lighting it up today, but is still posting a decent gain following its Q2 (Feb) earnings report this morning. This supplier of indoor and outdoor lights for commercial, industrial, infrastructure (street lights), and residential applications beat handily on EPS. However, revenue declined 4% yr/yr to $905.9 mln, which was slightly below analyst expectations. A silver lining was that AYI did raise FY24 adjusted EPS guidance on the call to $14.75-15.50 from $13.00-14.50.
- Its Acuity Brands Lighting segment posted a 5.3% yr/yr revenue decline to $843.5 mln with a 14.9% operating margin. However, its Intelligent Spaces Group segment posted impressive revenue growth, up 17% yr/yr to $68.1 mln with 13.4% operating margin. As you can see, the ABL segment is by far the larger segment, so the revenue decline there drove the overall decline. But the ISG unit has been growing nicely in recent quarters as that segment continues to grow.
- In ABL, Acuity has been making changes to its business over the last four years. It has made the business more predictable, repeatable, and scalable by increasing product vitality, elevating service levels, and driving productivity. For example, its Contractor Select is comprised of about 300 of its most popular products used in common everyday lighting applications. These products are designed to be resold and are in stock at retailers and electrical distributors. There is also Design Select, which allow customers to easily select products needed for their projects. ABL is less than a year into launching the first wave of Design Select, and the reception so far has been positive.
- Importantly, AYI sounds positive on its infrastructure (street lights etc.) business as projects get funding. AYI says it's feeling good about its positioning for the larger projects that are coming down the pike. Orders are strong, but shipments and sales will be spread out over the next year or two. As such, there will be a continued impact from infrastructure. AYI is confident it will get at least its fair share and it is working to get a disproportionate share.
- In terms of why it raised guidance, AYI says it is performing well. It is satisfying customers, expanding margins, and generating strong free cash flow. Order rates in both its lighting business and its spaces business are growing yr/yr. In its lighting business, AYI is back to typical lead times and, absent the impact of sales from excess backlog last year, AYI would be experiencing sales growth. In its spaces business, AYI will continue to grow geographically and add to what it can control in a built space.
Overall, investors seem pretty pleased with AYI's Q2 results. AYI has had up and down years the past few years, caused by the pandemic, then a rush to increase production to meet high demand, then perhaps too much inventory. It was encouraging to hear AYI is back to typical lead times and that order rates are growing for both segments. The stock had run roughly $100 since late October, recently trading above $270 for the first time since 2016. As such, we thought investor sentiment was very high heading into this report. However, investors are encouraged by what they see.
Dave & Buster's hits 52-week highs despite weak Q4 results; investors focus on silver linings (PLAY)
Shares of Dave & Buster's (PLAY +10%) are posting a new high score today despite the entertainment dining venue operator missing Q4 (Jan) earnings and sales estimates and registering another quarter of negative pro forma same-store sales growth. Falling short of top and bottom-line targets has become fairly typical for PLAY, delivering its fourth straight sales shortfall and second earnings miss over the past four quarters.
So why are shares at multi-year highs today?
- Weather-related headwinds, forcing full and partial store closures, primarily drove PLAY's weak revenue growth of 6.3% yr/yr to $599.1 mln and pro forma combined comps of -7.0%. The market already digested weather disruptions after many other restaurant franchises, including Chili's owner Brinker (EAT), Darden Restaurants (DRI), which owns Olive Garden, and Texas Roadhouse (TXRH), discussed meaningful adverse weather-related impacts during their recent quarterly conference calls.
- PLAY continues demonstrating financial discipline via solid margin expansion, improving Q4 adjusted EBITDA margins by 80 bps yr/yr to 25.3%. For the year, PLAY grew its margins by 380 bps since 2019, well ahead of its 200 bp goal. While revenue growth has aided margin expansion, PLAY has also implemented a comprehensive cost management program, including investing in equipment to reduce overhead and optimizing daily operations.
- International developments remain encouraging. PLAY recently signed another international franchise partnership for two stores in the Dominican Republic, totaling 33 stores in its development pipeline across six countries since reinvigorating its international efforts two years ago. Management anticipates opening up to four of these stores within the next 12 to 18 months, which could kickstart an additional healthy revenue stream.
- Loyalty membership continues to expand, growing by 500,000 in Q4. PLAY noted that loyalty members are quickly becoming the bulk of its most profitable customers, visiting stores 50% more often and spending 15% more per visit than non-loyalty guests. Those numbers are significant, making continuous membership growth vital to PLAY's long-term success.
- Adding $100 mln to its repurchase authorization also provides kindling PLAY's jump higher today. The company has $200 mln under its buyback plan, translating to roughly 7% of its outstanding shares.
There are still some lingering challenges facing PLAY. Q1 (Apr) has not got off to a hot start. Management remarked that performance thus far in the quarter has been choppy, hindered by some calendar shifts surrounding spring breaks. Meanwhile, inflation remains a thorny issue as it hikes input costs, including wages, while eroding consumer purchasing power.
Nevertheless, as a secular shift toward experiences and services unfolds since the pandemic, PLAY is primed for another solid year ahead despite the slow start to Q1. Management has been instituting several enhancements to capitalize on this trend through improved food and beverage, remodeling its stores, reigniting interest in its Special Events business, and adding features for further app engagement, all of which could continue bolstering loyalty membership and push comps back into positive territory.
Tesla's disappointing Q1 deliveries put growth concerns back under the spotlight (TSLA)
After Tesla (TSLA) reported disappointing Q1 deliveries that fell short of expectations, growth concerns for the leading EV maker are back under the spotlight, driving shares lower once again. For the year, TSLA is now down by about 33%, reflecting participants diminished expectations for earnings and revenue growth in FY24.
- On that note, Q1 deliveries declined by 8.5% yr/yr to 433,000, representing TSLA's first yr/yr decline since the pandemic-impacted year of 2020. Importantly, that decrease is partly due to extraordinary events that were out of TSLA's control.
- For instance, in early March, TSLA's Berlin factory was forced to shut down after a fire broke out at a nearby power pylon, causing a power outage. The suspected arson attack caused the factory to be shut down for more than a week. Additionally, shipping diversions caused by the Red Sea conflict created parts shortages, leading TSLA to halt production at the Berlin plant for about two weeks.
- However, it was evident even before these events occurred that sales were sluggish for TSLA, particularly in China, where competition is especially fierce. On March 4, Bloomberg reported that shipments from TSLA's Shanghai factory fell to their lowest level in over a year, diving by 19% yr/yr. What's especially concerning about the shipment drop is that it comes as TSLA keeps its foot on the accelerator when it comes to price cuts and incentives.
- This scenario suggests that the intensifying competitive landscape is taking an even bigger toll on TSLA. Yesterday, several Chinese EV makers reported March delivery figures that were better-than-expected. NIO (NIO), for example, disclosed that deliveries increased by 14.3% in March to 11,866, while Li Auto (LI) and XPeng (XPEV) achieved growth of 39% and 29%, respectively. Those companies have participated in the price war that TSLA instigated a year ago, cutting into margins and profits, but it's clear that they are picking up some share against TSLA.
- When TSLA reported downside Q4 results on January 24, it warned that vehicle volume growth in 2024 may be notably lower than the growth achieved in 2023. As that prediction begins to come to fruition, TSLA is turning to its full self-driving (FSD) platform to try to spark demand. The company recently announced a 1-month free trial for FSD, banking on high attach rates to push sales higher.
- From a longer-term perspective, FSD is central to TSLA's growth strategy as the company attempts to transition to a software/AI company. TSLA has been pouring billions into the technology, which has cut further into its profits. Following a 43% jump in Q3, operating expenses were up 27% in Q4, causing operating income to plunge by nearly 50% yr/yr to $2.1 bln. Considering TSLA's hefty investments in FSD, investors are anxious to see a pay off, but it could be several quarters before software revenue is really moving the needle.
The main takeaway is that TSLA's disappointing Q1 deliveries further solidified the notion that FY24 will likely be a difficult year for the company as its expected growth catalysts -- mass market Model 2 vehicle and FSD software revenue -- remain a year or more away.
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