| | | Market Snapshot
| Dow | 39765.64 | +408.63 | (1.04%) | | Nasdaq | 17187.61 | +407.00 | (2.43%) | | SP 500 | 5434.43 | +90.04 | (1.68%) | | 10-yr Note | +26/32 | 3.85 |
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| | NYSE | Adv 2233 | Dec 532 | Vol 899 mln | | Nasdaq | Adv 3082 | Dec 1144 | Vol 5.4 bln |
Industry Watch
| Strong: Information Technology, Consumer Discretionary, Health Care, Communication Services, Industrials, Real Estate, Materials |
| | Weak: Energy |
Moving the Market
-- Reacting to the July Producer Price Index, which showed disinflation in total PPI and core PPI
-- Drop in market rates in response to PPI data
-- S&P 500 trading above 5,400 for the first time since August 1, before the jobs report that precipitated last Monday's sharp selloff
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Closing Summary
13-Aug-24 16:25 ET
Dow +408.63 at 39765.64, Nasdaq +407.00 at 17187.61, S&P +90.04 at 5434.43
[BRIEFING.COM] The stock market rallied today, leaving all the major indices higher by at least 1.0%. Advancers led decliners by a 4-to-1 margin at the NYSE and by a nearly 3-to-1 margin at the Nasdaq. The positive bias followed pleasing Producer Price Index data for July.
Total PPI jumped 0.1% month-over-month in July (Briefing.com consensus 0.1%) while core PPI, which excludes food and energy, was flat (Briefing.com consensus 0.2%). The monthly figures left total PPI up 2.2% year-over-year, versus 2.7% in June, and core PPI up 2.4%, versus 2.9% in June.
The welcome disinflation in the report contributed to optimism around the Fed's rate cut path, which sent yields lower and boosted equities. The upside bias may continue tomorrow if the release of the July Consumer Price Index at 8:30 ET corroborates the market's view.
Treasury yields were already lower following some weak new loan data out of China and some weak economic sentiment data out of the eurozone and dropped further in response to the PPI data. The 10-yr note yield fell six basis points to 3.85% and the 2-yr note yield, which is most sensitive to changes in the fed funds rate, dropped eight basis points to 3.94%.
With today's move higher, the S&P 500 closed above 5,400 for the first time since August 1, just before the jobs report that precipitated last Monday's sharp selloff. Just about everything participated in upside moves, leaving ten of the 11 S&P 500 sectors higher.
The heavily-weighted information technology (+3.0%), consumer discretionary (+2.4%), communication services (+1.5%), and health care (+1.2%) sectors led the pack. Meanwhile, the energy sector logged a 1.0% decline amid falling commodity prices. WTI crude oil futures settled 1.9% lower at $78.37/bbl and natural gas futures settled 1.4% lower at $2.16/mmbtu.
Dow component Home Depot (HD 350.07, +4.26, +1.2%) closed with a solid gain after trading down as much as 1.9% in response to below-consensus guidance.
Fellow discretionary-related name Starbucks (SBUX 95.90, +18.87, +24.5%) was the biggest advancer in the S&P 500, surging on the news that CEO Laxman Narasimhan has stepped down and will be replaced by Chipotle (CMG 51.68, -4.19, -7.5%) CEO Brian Niccol.
- Nasdaq Composite:+14.5% YTD
- S&P 500: +13.9% YTD
- S&P Midcap 400: +6.2% YTD
- Dow Jones Industrial Average: +5.5% YTD
- Russell 2000: +3.4% YTD
Reviewing today's economic data:
- July NFIB Small Business Optimism 93.7; Prior 91.5
- July Core PPI 0.0% (Briefing.com consensus 0.2%); Prior was revised to 0.3% from 0.4%, July PPI 0.1% (Briefing.com consensus 0.1%); Prior 0.2%
- The key takeaway from the report is the disinflation trend in total and core PPI, as that is moving in a necessary direction to drive a rate cut by the Fed.
Wednesday's economic lineup features:
- 7:00 ET: Weekly MBA Mortgage Index (prior 6.9%)
- 8:30 ET: July CPI (Briefing.com consensus 0.2%; prior -0.1%) and Core CPI (Briefing.com consensus 0.2%; prior 0.1%)
- 10:30 ET: Weekly crude oil inventories (prior -3.73 mln)
Oil prices slide, weighing on energy sector
13-Aug-24 15:40 ET
Dow +378.56 at 39735.57, Nasdaq +361.26 at 17141.87, S&P +79.89 at 5424.28
[BRIEFING.COM] There hasn't been much up or down movement at the index level in recent trading.
Small and mid cap stocks have maintained a positive posture, along with their larger peers. The Russell 2000 is trading 1.2% higher and the S&P Mid Cap 400 shows a 1.1% gain.
Separately, oil prices slumped $1.54, or 1.9%, to $78.37/bbl. This price action has clipped the S&P 500 energy sector (-1.1%), which is the lone standout in negative territory today.
Positive bias continues in front of CPI tomorrow
13-Aug-24 15:10 ET
Dow +372.56 at 39729.57, Nasdaq +368.56 at 17149.17, S&P +80.81 at 5425.20
[BRIEFING.COM] The major indices have maintained their upside bias through the entire session. The S&P 500 sports a 1.6% gain and the Nasdaq Composite trades 2.3% higher.
Looking ahead, Cardinal Health (CAH), UBS AG (UBS), Dole plc (DOLE), and others report earnings in front of Wednesday's open. Market participants will also be focused on the Consumer Price Index for July, which is released at 8:30 ET.
Treasury yields are lower in front of the CPI report. The 10-yr note yield is down six basis points to 3.85% and the 2-yr note yield is down eight basis points to 3.94%.
Estee Lauder, Monolithic Power among top-performing S&P 500 constituents on Tuesday
13-Aug-24 14:30 ET
Dow +344.04 at 39701.05, Nasdaq +374.18 at 17154.79, S&P +78.96 at 5423.35
[BRIEFING.COM] The S&P 500 (+1.48%) is comfortably in second place on Tuesday afternoon, hovering just shy of HoDs in recent trading.
Elsewhere, S&P 500 constituents Estee Lauder (EL 91.45, +5.25, +6.09%), Monolithic Power (MPWR 866.92, +42.97, +5.22%), and Builders FirstSource (BLDR 159.44, +6.14, +4.01%) pepper the top of today's standings. EL is slated to release earnings early next week, MPWR follows general strength in chip stocks.
Meanwhile, Baxter (BAX 34.35, -2.58, -6.99%) is near the bottom of the average; news out this morning that BAX was divesting its Kidney Care segment to Carlyle (CG 40.25, +0.83, +2.11%) for $3.8 bln, and some on the Street are saying the dilution on the deal is worse than expected.
Gold slightly higher as PPI data pressures dollar, yields
13-Aug-24 14:00 ET
Dow +326.53 at 39683.54, Nasdaq +362.98 at 17143.59, S&P +76.60 at 5420.99
[BRIEFING.COM] The tech-heavy Nasdaq Composite (+2.16%) is today's top-performing major average with nearly two hours to go on Tuesday.
Gold futures settled $3.80 higher (+0.2%) to $2,507.80/oz, aided in part by a weaker dollar and treasury yields which stem from this morning's pleasing Producer Price Index for July.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $102.75.
Home Depot's results still reflect lackluster demand, but prospect for lower rates fuels hope (HD)
As anticipated, demand for home improvement products and projects remains subdued, as reflected by Home Depot's (HD) comparable sales decline of 3.3%, which missed analysts' expectations, and its downwardly revised FY25 revenue and comp guidance. For HD and rival Lowe's (LOW), the story remains much the same as persistently high interest rates, a sluggish housing market, and macroeconomic uncertainties continue to prevent consumers from making big ticket purchases.
- Like last quarter, both foot traffic and average ticket declined in Q2, falling by 1.8% and 1.3%, respectively. Unfortunately, HD doesn't expect the demand environment to improve over the remainder of its fiscal year, forecasting FY25 comps to decline between 3% and 4%. That projection is down from its prior guidance for a decline of approximately 1%.
- Additionally, HD also cut its FY25 EPS guidance, despite the fact that it beat Q2 EPS estimates by a comfortable margin. Specifically, the company now expects EPS to decrease by 1-3% compared to its previous outlook of a drop of 1%. The reduced earnings outlook appears to be a function of its $18.25 bln acquisition of SRS Distribution from this past March. When HD announced the acquisition, it disclosed that the transaction was expected to be dilutive to GAAP EPS due to amortization expense.
- On the flip side, HD raised its FY25 revenue guidance to reflect the impact from the SRS Distribution acquisition. The company now sees revenue growth of 2.5-3.5%, up from growth of 1%.
- From a strategic perspective, the addition of SRS Distribution will expand HD's Pro business and capabilities, providing it with exposure to larger-scale, more complex projects. It will also help to fend off rival LOW, which has been making a strong push into the Pro business over the past few years. On August 20, LOW is scheduled to report its Q2 results and expectations will be muted in the wake of HD's performance.
- Shares of HD and LOW are taking HD's soft results and guidance in stride, though, partly because of those tempered expectations. Also, the market is looking ahead to when the Fed eventually does cut rates, providing a likely boost to the home improvement retail market. Lower rates would help make large scale projects more affordable, and they might entice more homeowners to put their current homes on the market, which typically requires some home improvement activities.
The main takeaway is that business is stuck in a bit of a rut right now for HD, but the longer-term picture is still bright due to the underlying healthy dynamics for the home improvement category and the potential to gain more market share as HD integrates its SRS Distribution acquisition.
On continues to run after warehouse issues that weighed on Q2 results quickly shrugged off (ONON)
Premium footwear maker On (ONON +6%) stumbled out of the gate today following a Q2 earnings miss and a modestly lowered FY24 net sales outlook, as shares rapidly descended to lows of around -2.8%. However, On quickly refound its footing as shares climb back toward initial highs. Today's volatility stemmed from the ongoing transition of On's Atlanta warehouse to a fully automated facility, which is producing capacity constraints and leading to unreliable deliveries and inventory shortages. These headwinds impacted On's DTC and wholesale customers, leading to missed market share opportunities and top-line growth underperforming the company's previous FY24 forecast.
On has already installed several measures to counteract the adverse effects of its warehouse transition, driving a reacceleration of its D2C growth rate during the back half of the quarter and continuing into Q3. While management conceded that the damage had already been done, leading to its trimmed FY24 reported net sales of at least CHF 2.26 bln from CHF 2.29 bln, it reiterated the transition is essential to scale its distribution capacity across the U.S., resulting in long-term gains in the region.
- On's Q2 numbers make it tough to argue with its long-term plan. Demand has consistently remained robust, leading to consolidated net sales growth of 27.8% to CHF 567.7 mln. Despite the warehouse woes, On's Americas wholesale and DTC net sales growth stayed buoyant, expanding by 27.6% and 28.1%, respectively. In the EMEA, net sales jumped by 21.8% yr/yr, bolstered by exceptional momentum across the U.K. Meanwhile, in the APAC region, net sales exploded, surging by 73.7%, underpinned by sustained momentum in China.
- On's top-line performance is reminiscent of that registered by Deckers Outdoor (DECK) last month. It is also consistent with Adidas AG's (ADDYY) recently raised FY24 sales outlook. With NIKE's (NKE) problems persisting, its rivals are constantly taking advantage, supported by a relatively sound demand environment.
- EPS of CHF 0.14 was a hair shy of analyst forecasts, as the issues in Atlanta trickled down to On's bottom line. However, On did increase its gross profit and adjusted EBITDA margins in the quarter, benefiting from lower freight rates and a more stable FX rate. Furthermore, On remains on track to reach its previously outlined profitability goals for the year, including gross margins of around 60% and adjusted EBITDA margins of 16.0-16.5%.
The problem at hand for On is insufficient and sub-optimized inventory rather than any demand woes, like what NKE is currently enduring. Despite weighing on Q2 results, On's headwinds can be more easily reversed than a structural demand problem. Investors agree, keeping On's upward trend going after a brief pullback today. With the company already taking the necessary moves to overcome its warehouse issue while maintaining focus on fortifying its higher-margin DTC channel as it adds fewer wholesale doors than in past years, its future remains bright.
Starbucks snags Chipotle CEO in shocking move; provides hope Starbucks can turn brand around (SBUX)
Starbucks (SBUX +22%) made some pretty shocking news this morning when it announced it had hired Chipotle (CMG -12%) CEO Brian Niccol as its new Chairman and CEO. Laxman Narasimhan is stepping down as CEO, effective immediately. Starbucks CFO Rachel Ruggeri is now serving as interim CEO until Niccol takes the helm on September 9, 2024.
- This news came just after the WSJ reported late Friday that activist investor Starboard Value had taken a stake in the coffee chain. This follows previous reporting from CNBC that Elliott Mgmt had accumulated a stake that could worth as much as $2 bln. Clearly, these firms saw value in SBUX shares, which have fallen 30% from their mid-November 2023 highs. While it's unclear how much of a role these activist investors had in the new CEO hire, clearly, SBUX felt a change was needed at the top.
- Since Niccol took the helm at CMG, revenue has nearly doubled, profits have increased nearly sevenfold, and the stock price has increased by nearly 800%. SBUX says his focus on brand, menu innovation, operations and digital transformation have set new standards in the industry. Before that, Niccol served as CEO of Yum! Brands' (YUM) Taco Bell Division, where he was responsible for the highly successful turnaround of that business.
- Turning Starbucks around will not be an easy lift. With consumers increasingly seeking value, Starbucks premium pricing has been a headwind for the company. SBUX has missed on revenue in each of the past three quarters and four of the past five. Comps have been weak. SBUX has been improving operations and supply chain, while also introducing new drinks, with an increased focus on energy drinks. However, SBUX was been criticized for being late to the energy and boba trends.
- China is a whole other story. SBUX has invested heavily in China, but Starbucks is facing cautious consumer spending and intensified competition. SBUX has seen unprecedented store expansion in the past year and a mass segment price war at the expense of comp and profitability. In Q3 (Jun), China posted -14% comps. However, SBUX plans for more stores.
Overall, Niccol was a big get for Starbucks and that's reflected in the price action today. He has not said what changes he will make. However, we suspect he may advocate for slowing SBUX's ambitious plans for new openings. Also, one thing about Niccol is that he is innovative in terms of the menu and Starbucks needs to be better at getting ahead of trends. He had success with Taco Bell's menu and Chipotle has rolled out popular seasonal items.
Niccol also has a track record for pushing heavily on digital ordering, we suspect that will be a focus. But the elephant in the room is how to appeal to consumers' desire for value when your brand is a premium brand. That is not an easy fix, we suspect some value pricing or pairing with food will be considered. Finally, what does this mean for Chipotle? The stock has been under pressure since mid-June and this is adding to the weakness. Investors are sad to lose Niccol, plus it's fair to wonder what he saw at CMG that made him decide to leave?
Sea Limited catches a nice wave as its e-commerce platform expected to reach profitability soon (SE)
Shares of Sea Limited (SE +11%) are catching a nice wave higher today despite the Southeast Asian e-commerce, gaming, and financial services juggernaut registering its sixth consecutive earnings miss in Q2. Over a year ago, SE turned its attention away from profitability, ensuring its competitive position surrounding its e-commerce platform, Shopee, was more secure as peers began encroaching on its market share. Therefore, the string of bottom-line misses and the 74% plunge in EPS yr/yr in Q2 has not been too shocking. Instead, investors have been watching top-line growth and whether it has consistently outpaced rivals.
- On that front, SE delivered another quarter of healthy sales growth in Q2, posting a 23.0% gain yr/yr to $3.81 bln, topping analyst estimates for the fourth straight quarter. Gross merchandise volume (GMV) expanded by 29.1% yr/yr on a 40.3% pop in gross orders. SE stated that retail and consumer spending trends have been generally healthy across the region.
- From a competitive standpoint, SE was pleased by Shopee's market share in Southeast Asia, noting that it commands a sizeable lead over its peers. Management added that it is observing market share consolidation and an industry-wide take-rate bump. As a result, SE projected positive adjusted EBITDA for Shopee starting in Q3 and continuing thereafter. The company also raised Shopee's 2024 two-year GMV growth rate to the mid-20s.
- Shopee's two straight quarters of outsized results reflect SE's recent initiatives, including improving price competitiveness, which partly illuminates the sharp earnings contraction.
- With Shopee on track to achieve profitability soon, SE is beginning to prioritize increasing its advertising take rate, which currently sits lower than the industry average for a mature e-commerce firm. SE has been working to make its ad platform more attractive for sellers, hiring a dedicated team to improve its algorithm to enhance returns on ad spend. Thus far, SE is enjoying early success, with the number of sellers paying for ads jumping by over 20% yr/yr. While the base from which SE is starting is unclear, the growth is still encouraging.
- SE's other businesses, Digital Financial Services and Digital Entertainment, recorded solid growth, with Entertainment enjoying solid acceleration from last quarter. Financial Services revs climbed by 21.4% yr/yr, nearly identical to the jump in Q1, led by continued momentum in SeaMoney, which pairs nicely with Shopee. Digital Entertainment posted bookings growth of 21.1% yr/yr, doubling the pace of growth from Q1, supported by Free Fire, SE's long-standing video game that boasts over 100 mln daily active users.
With investors not too concerned about relatively weak bottom-line performance in the immediate term, SE's Q2 results were more than adequate to keep its rally alive. Shares have now added around +30% from last week's intraday lows. SE reiterated that it is not fixated on boosting profits in the near term. Instead, it remained confident that its game plan surrounding Shopee and the accompanying strength of the Southeast Asia demand landscape would eventually produce sustainable profitability, which appears to already be materializing in Q3.
Columbia Sportswear's turnaround efforts lay the groundwork for returning to growth (COLM)
Columbia Sportswear (COLM) returned to our Value Leaders Rankings last week. The outdoor apparel company has been engaged in an ambitious turnaround plan as it contends with a macroeconomic landscape that has taken a noticeable toll on its U.S. business, which comprises around two-thirds of its total sales. This backdrop has weighed on past results and guidance; COLM recently projected Q3 figures below consensus but did leave its FY24 outlook unchanged.
However, following its seasonally weak Q2 report, the majority of COLM's woes appear to be easing, allowing the company to finally focus on returning to growth.
- Cost containment and inventory reduction efforts have been producing benefits. COLM's inventory exiting Q2 was down by 29% yr/yr, providing a leaner framework to reduce discounting and boost margins. Meanwhile, COLM's profit improvement program is on target to produce $75-90 mln in cost savings in FY24, supporting the company's plans to generate over $350 mln in operating cash flow.
- COLM's turnaround has mirrored the ongoing comeback of its close rival, V.F. Corp (VFC), which is digging itself out of a much deeper hole. Unlike VFC, COLM has relatively little debt, boasting a debt-to-equity ratio of around 19% compared to the 193% for VFC. The lower debt profile of COLM helps free up capital to bolster its struggling brands, while VFC is fixated on lowering its debt in the short term.
- COLM's non-core banners, SOREL, prAna, and Mountain Hardwear, registered shrinking sales growth last year, with SOREL and prAna's yr/yr sales decline only widening through the first six months of FY24. However, COLM has already been through the thick of it, noting last month that its efforts to stabilize SOREL and lay the foundation for its next growth phase are in motion. Meanwhile, prAna's turnaround efforts have shown early positive signs, mostly in future season orders, which suggest a return to growth.
- COLM's unchanged FY24 guidance underpins an expected brighter second half of the year relative to the first. Management has maintained an uplifting tone throughout its turnaround plan, delivering incremental progress each quarter. With the coming back-to-school and holiday shopping seasons, COLM may be able to exit a turbulent FY24 on the right foot.
One of the core elements of COLM's turnaround is attracting a younger demographic. By catering to the outdoor lifestyle, which requires the right apparel and equipment, COLM has a unique marketing angle to lure younger consumers to its assortment of brands, especially given the trend of spending more on experiences than things. The suppressed discretionary spending climate may linger over the near future as incomes slowly catch up to the cumulative inflation and unemployment creeps higher. However, COLM's financials, including zero short-term debt and solid cash flow generation, its well-established core banner, and ongoing turnaround progress, give it an edge in navigating short-term uncertainty. As always, a stop loss limit of 15-20% is a good idea.
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