Market Snapshot
| Dow | 42011.59 | -184.93 | (-0.44%) | | Nasdaq | 17918.48 | -6.65 | (-0.04%) | | SP 500 | 5699.94 | -9.60 | (-0.17%) | | 10-yr Note | -6/32 | 3.85 |
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| | NYSE | Adv 958 | Dec 1772 | Vol 894 mln | | Nasdaq | Adv 1384 | Dec 2805 | Vol 5.2 bln |
Industry Watch
| Strong: Energy, Communication Services, Information Technology |
| | Weak: Consumer Discretionary, Materials, Real Estate, Health Care, Consumer Staples, Financials |
Moving the Market
-- Ongoing geopolitical worries
-- Waiting on Friday's employment report
-- Mega caps and semiconductor-related names pulling back from their best levels impacting index performance
-- Rising Treasury yields keeping buying in check in the equity market
| Closing Summary
03-Oct-24 16:25 ET
Dow -184.93 at 42011.59, Nasdaq -6.65 at 17918.48, S&P -9.60 at 5699.94
[BRIEFING.COM] The S&P 500 settled a whisker shy of 5,700, down nearly ten points (-0.2%) from yesterday. The Nasdaq Composite settled flattish while the Dow Jones Industrial Average logged a 0.4% decline and the Russell 2000 fell 0.7%.
There was an element of hesitation in today's trade ahead of Friday's employment report, which may impact the market's thinking on the Fed's rate cut path. Today's negative bias also stemmed from geopolitical worries, which manifested in further upside action in oil prices.
WTI crude oil futures settled 5.0% higher at $73.73/bbl. This price action led the S&P 500 energy sector (+1.6%) to register the largest gain among the 11 sectors by a decent margin.
Treasuries, which usually benefit from geopolitical tension as a safe-haven trade, closed with losses across the curve. The 10-yr yield settled seven basis points higher at 3.85% and the 2-yr yield settled seven basis points higher at 3.71%.
The jump in yields was due in part to the release of the September ISM Non-Manufacturing Index, which beat expectations, but didn't change rate cut probabilities in front of the jobs report. The fed funds futures market sees a 65.4% probability of a 25 basis points cut at the November FOMC meeting, little changed from 64.8% yesterday and up from 50.7% one week ago, according to the CME FedWatch Tool.
Semiconductor shares, led by NVIDIA (NVDA 122.85, +4.00, +3.4%), showed relative strength today after CEO Jensen Huang told CNBC in an interview after yesterday's close that demand for Blackwell is "insane." The PHLX Semiconductor Index (SOX) closed 0.5% higher and the S&P 500 information technology sector, which houses chipmaker constituents, closed 0.6% higher.
The only other sector to close higher was communication services (+0.2%) thanks to a gain Meta Platforms (META 582.77, +9.96, +1.7%).
Five of the 11 sectors closed more than 0.9% lower. The consumer discretionary sector was the biggest laggard, dropping 1.3%.
- S&P 500: +19.5% YTD
- Nasdaq Composite: +19.4% YTD
- Dow Jones Industrial Average: +11.5% YTD
- S&P Midcap 400: +11.0% YTD
- Russell 2000: +7.6% YTD
Reviewing today's economic data:
- Weekly Initial Claims 225K (Briefing.com consensus 223K); Prior was revised to 219K from 218K, Weekly Continuing Claims 1.826 mln; Prior was revised to 1.827 mln from 1.834 mln
- The key takeaway from the report is that initial jobless claims, a leading indicator, remain well below recession-like levels (the average of initial claims for the last five recessions, excluding the COVID recession, was 458,000), imparting an encouraging understanding that the labor market might be bending but it isn't breaking.
- September S&P Global US Services PMI - Final 55.2; Prior 55.7
- August Factory Orders -0.2% (Briefing.com consensus 0.1%); Prior was revised to 4.9% from 5.0%
- The key takeaway from the report is that business spending rebounded in August.
- September ISM Non-Manufacturing Index 54.9% (Briefing.com consensus 51.6%); Prior 51.5%
- The key takeaway from the report is that overall activity in the largest sector of the U.S. economy accelerated in September, albeit without an expansion in employment activity, as new orders increased along with prices. net-net, this is a report that meshes more with a soft landing outcome than a hard landing one.
Treasuries settle lower after strong ISM Services data
03-Oct-24 15:35 ET
Dow -239.56 at 41956.96, Nasdaq -51.01 at 17874.12, S&P -20.46 at 5689.08
[BRIEFING.COM] There hasn't been up or down action in the major indices heading into the close.
The 10-yr yield settled seven basis points higher at 3.85% and the 2-yr yield settled seven basis points higher at 3.71%. This price action followed the release of the September ISM Non-Manufacturing Index, which beat expectations.
Tomorrow's calendar features the release of the Employment Situation report for September at 8:30 ET. Market participants will be focused on how the Fed may think about rate cuts following the labor market data.
Three S&P 500 sectors trade higher
03-Oct-24 15:00 ET
Dow -268.56 at 41927.96, Nasdaq -58.18 at 17866.95, S&P -23.23 at 5686.31
[BRIEFING.COM] The three major indices are in a sideways flow. The S&P 500 sports a 0.3% decline, trading about 20 points lower than yesterday's close.
Only three S&P 500 sectors trade higher led by energy (+1.6%), which is benefitting from the price action in commodities. WTI crude oil futures trade 5.3% higher at $73.84/bbl and natural gas futures trade 2.8% higher at $2.97/mmbtu.
The information technology (+0.3%) and communication services (+0.1%) sectors also trade higher. Their respective mega cap components have provided support to the broader market. Meta Platforms (META 579.95, +7.14, +1.3%), NVIDIA (NVDA 122.53, +3.68, +3.1%), and Broadcom (AVGO 171.16, +0.50, +0.3%) are influential winners from the spaces.
Universal Health, Warner Bros. Discovery dip in S&P 500
03-Oct-24 14:30 ET
Dow -229.12 at 41967.40, Nasdaq -32.11 at 17893.02, S&P -16.47 at 5693.07
[BRIEFING.COM] The S&P 500 (-0.29%) is in second place to this point, having moved mostly sideways over the prior half hour.
Elsewhere, S&P 500 constituents Universal Health (UHS 215.43, -8.57, -3.83%), Warner Bros. Discovery (WBD 7.67, -0.30, -3.76%), and AES (AES 19.24, -0.65, -3.27%) pepper the bottom of the standings despite a dearth of corporate news.
Meanwhile, Vistra Corp. (VST 134.25, +8.88, +7.08%) is atop the average, helped by a tgt bump out of RBC Capital Mkts to $141 from $105.
Gold higher on Thursday
03-Oct-24 14:00 ET
Dow -293.44 at 41903.08, Nasdaq -50.24 at 17874.89, S&P -22.20 at 5687.34
[BRIEFING.COM] The tech-heavy Nasdaq Composite (-0.28%) is down about 50 points this afternoon.
Gold futures settled $8.50 higher (+0.3%) to $2,678.20/oz even as the dollar and yields moved modestly higher.
Meanwhile, the U.S. Dollar Index is up about +0.2% to $101.90.
BigCommerce slips after naming a new CEO following several periods of lackluster growth (BIGC)
Following slowing growth, a declining number of enterprise accounts, and lackluster profitability, BigCommerce (BIGC -1%) initiated a change at the top, removing former CEO Brent Bellm and appointing President Travis Hess as his successor. The move has not garnered much of a positive reaction today, reflecting the massive hill BIGC still needs to climb. Shares have tumbled by over 35% on the year and over 95% from 2020 highs.
With a new leader, BIGC is looking to reenergize itself. However, economic conditions and competitive pressures are acting as formidable headwinds. At the same time, BIGC's balance sheet is troubling, experiencing several periods of negative cash flows and widening net losses. With so much on his plate, investors are skeptical that the act of appointing a new CEO alone will be enough of a spark to jumpstart BIGC's array of issues.
- What does BIGC do? The company's primary business is offering its software-as-a-service, or SaaS, platform for businesses to set up online marketplaces, similar to its main rival, Shopify (SHOP). BIGC caters primarily to enterprises, with roughly two-thirds of its total revs branching from this cohort, but also has a third of its revs stemming from small and medium-sized businesses, or SMBs.
- What has been going so wrong for BIGC? Competition has been a thorn in BIGC's side. SHOP bolstered its brand recognition during the pandemic and came out the other side in a much better position than BIGC, illuminated by sustained periods of 20%+ revenue growth and steadily improving profitability. Compare this to BIGC, which has not delivered growth of 20%+ since 3Q22, posting a tepid +8.5% improvement on its top line in Q2. Meanwhile, BIGC's net income stagnated recently, delivering nearly flat yr/yr growth in Q2.
- SHOP's outperformance relative to BIGC indicates potentially constant market share loss for BIGC, putting it into a deeper hole for Mr. Hess to deal with.
- SHOP's success may be luring BIGC's current and potential enterprise customers to its platform. BIGC has endured sliding enterprise account numbers for three consecutive quarters, with the total stuck around 5,900. While average revenue per enterprise account has grown -- up 7% yr/yr in Q2 -- it has proven insufficient in igniting more attractive top-line growth.
While these sticking points are concerning and keeping shares of BIGC near all-time lows, Mr. Hess has the potential to remove some of the water from a sinking ship. The new CEO has comprehensive experience in IT consulting, previously holding leadership roles at Accenture (ACN). He has also served on partner advisory boards for SHOP and other software firms. As such, sweeping changes may be in store for BIGC in the near future. The company reports Q3 results sometime in the next few weeks.
Nevertheless, BIGC needs to prove itself before investors feel confident about piling in. Competition is intense, with plenty of options to pick from when setting up an e-commerce site. At the same time, macroeconomic conditions are unfavorable and can produce heightened volatility and uncertainty.
Constellation Brands' Q2 EPS beat falls flat as its wine and spirits business remains a drag (STZ)
Constellation Brands (STZ -2%) delivers another split earnings report in Q2 (Aug), as one half of its business continues to shine while the other continues to land itself in hot water. The alcoholic beverage maker and distributor enjoyed steady gains in its beer business as sales and shipment volumes continued to rise while several banners captured additional market share. The resilience of STZ's beer portfolio contributed to another double-digit earnings beat in the quarter and supported a decent uptick in revenue.
However, tugging against the beer business's outsized strength was STZ's wine and spirits business, which continues to struggle amid challenging macroeconomic conditions, posting a 12.0% drop in sales on a 9.8% decrease in shipment volumes. STZ warned last month that trends in wine and spirits were worsening since the start of the year, which ultimately led to a $2.25 bln goodwill impairment loss in Q2, toward the higher end of management's $(1.5)-$(2.5) bln estimate.
STZ has been overhauling its wine and spirits business over the past few years, offloading 90% of low-end brands to realign its focus on the higher end of its portfolio, leaning on premiumization trends that have been boosting its beer business. CEO William Newlands commented last month that it was starting to see benefits from its renewed premium focus, which he expected to be reflected in quarterly results during the back half of FY25. However, poor economic conditions remain a wild card and could potentially delay anticipated benefits.
- On the bright side, STZ's beer business is performing nicely despite the current unfavorable economic climate. Beer achieved a 6.0% jump in net sales, supported by a 4.6% increase in shipment volumes. Depletions edged 2.4% higher, driven by consistent demand for Modelo Especial, which saw a roughly 5% lift, and the Pacifico brand, which boasted an approximately 23% boost.
- Operating margins remained buoyant, expanding by 270 bps yr/yr to 42.6%. STZ has undergone cost-saving initiatives, such as swapping out wood pallets for plastic pallets and altering stacking to improve logistics costs, helping to already achieve savings of around $260 mln of its $300 mln target. Management has remarked that it will continue to target additional savings even after hitting its goal.
- As a result of the sturdy performance within beer, STZ delivered adjusted EPS of $4.32, a 14% improvement yr/yr, and revs of $2.92 bln, a 3% jump. Also supported by continued strength in beer, STZ reiterated its FY25 guidance, including adjusted EPS of $13.60-13.80 and revenue growth of +4-6%. However, with STZ reaffirming these targets just last month, investors are not surprised that the company left them unchanged today.
The dichotomy between STZ's two businesses is creating a rift in the company's consolidated results and possibly stunting its stock price. Investors are growing impatient with the continuous drag wine and spirits are producing, making it pertinent that STZ turns around this business sooner rather than later. Unfortunately for the company, this still largely depends on when current economic headwinds will ease.
Levi Strauss comes under pressure on lackluster Q3 results, possible sale of Dockers brand (LEVI)
Levi Strauss (LEVI -8%) is sharply lower despite reporting modest EPS upside with its Q3 (Aug) results last night. However, the denim icon posted revenue growth of just 0.4% yr/yr to $1.52 bln, which was a bit light. Also, it lowered its FY24 revenue outlook to +1% from +1-3% and it said FY24 adjusted EPS is now looking to come in at the middle of prior guidance, which is a bit below analyst expectations.
- Besides earnings, the other big news was LEVI announcing it will conduct a review of strategic alternatives for its Dockers brand, which may include a sale. Dockers is more of a khaki brand and it has been struggling. In Q3, sales of Dockers decreased -15% r/yr and -13% CC. Recall that LEVI also recently announced plans to exit its Denizen fashion line. It's clear that the new CEO, Michelle Gass, wants to focus on its namesake and higher margin Levi's brand and its Beyond Yoga athletic brand.
- Turning to the Q3 results, there were some good things. The Levi's brand was up 5% globally, which was the best quarterly growth for Levi's in two years. The company says it's seeing meaningful, positive momentum of the Levi's brand globally. And it believes that will accelerate in Q4 (Nov), fueled by its new Beyoncé campaign and product innovation.
- Its Levi's brand continues to gain market share as it's the #1 women's denim brand in the US. Its Levi's women's business remains robust, growing 11%, reflecting double-digit growth in both bottoms and tops. It also is maintaining its leadership in the men's US jeans category, where it holds a dominant position. Levi's market share for men's is twice that of its closest competitor. Levi's also continues to gain share among high income consumers supported by its efforts to elevate the brand.
- Also, LEVI is focusing much more on becoming a DTC (Direct-to-Consumer) brand and DTC sales were up 12% in Q3. Other positives were the US continuing to see positive growth and Europe (its highest margin geography) returned to growth. Margins were another bright spot as gross margin jumped to a record 60.0% from 55.6%, primarily driven by lower product costs, the continued shift to DTC and higher full price sales. That caused adjusted EBIT margin to increase to 11.6% from 9.1% last year.
- The problem areas were its Dockers brand and its Levi's Signature line declined in the quarter. However, LEVI says the latter was largely a timing issue and it expects it to return to growth in Q4. China and Mexico wholesale were also problem areas, and is partly why LEVI lowered its outlook. As a result of these headwinds, LEVI is expecting mid-single digit revenue growth for Q4.
Overall, this quarter was a letdown for investors. There was a lot of excitement around the new CEO hire in January 2024. We suspect that investors are a bit frustrated that the turnaround is taking longer than expected. Selling the struggling Dockers brand seems like a good idea. With fewer people working in offices, khakis seem to be generating less demand. It's clear that the company really wants to pare down its brands and focus on Levi's and Beyond Yoga. Also, the company is making a push to elevate the Levi's brand and focus on full price sales. Levi's is also excited about its recently launched ad campaign with Beyoncé.
RPM Inc painted in a positive light as investors focus on the several uplifting trends in Q1 (RPM)
RPM Inc (RPM +6%), a specialty coating, sealants, and building materials supplier, is being painted in a positive light today despite missing Q1 (Aug) revenue estimates and projecting downbeat Q2 (Nov) revenue growth. The operating environment remains challenging. Inflation has been sticky, commercial construction has been sluggish, DIY activity has softened, and large construction projects are experiencing delays.
Against this dismal backdrop, investors were likely not wagering on exceptional revenue growth in Q1. Similarly, while short of consensus, RPM's flat revenue growth outlook for Q2 is not alarming. In fact, flat growth would mark a decent improvement over the 2.1% decline RPM endured in Q1 to $1.97 bln. Meanwhile, RPM continues to expect a back-half weighted year, reiterating its FY25 revenue growth forecast of low-single-digits despite the shortfalls in the year's first half.
- There were also several promising developments during the quarter. For starters, RPM delivered its third straight quarter of earnings upside, expanding its bottom line by 12.2% yr/yr to $1.84 despite the pressure on its top line. This outperformance showcased RPM's MAP 2025 initiatives, which center on streamlining its SG&A structure, pivoting to growing end markets, and investing in targeted growth opportunities. The benefits rolled in nicely to start FY25, resulting in a Q1 record for adjusted operating margins.
- RPM's Construction Products Group (CPG) and Performance Coatings Group (PCG) were the leaders in Q1. CPG was the only segment to deliver positive yr/yr sales growth at 1.4%, led by roofing and wall systems. PCG fell by 1.8%, which still outpaced RPM's overall sales contraction, aided by a focus on maintenance and restoration projects. Helping both segments has been RPM's smart move to shift from distribution centers and EV manufacturing to the now lucrative data center market.
- RPM's fluidity in adapting to the most lucrative markets over time is a testament to management's focus on constantly extracting the most out of its current environment.
- Conversely, Specialty Products Group (SPG) and Consumer Group trailed in Q1, registering 3.5% and 6.1% drops in revenue yr/yr, respectively. The overarching issue is that these two segments are heavily exposed to residential end markets, where demand remains lackluster. Management mentioned that it was encouraged by declining interest rates but cautioned that it was too early to determine when this would translate into increased housing turnover.
- Also worth pointing out are the strikes at East Coast ports. At this time, RPM was unsure whether it would encounter a material impact from the strikes. However, it is worth keeping an eye on.
- Still, RPM reiterated its guidance because of the bright spots within its other segments. CPG is expected to remain resilient, supported by the demand for roofing and wall systems. Meanwhile, PCG growth is steadily improving, reflecting the positive impact of more effective sales management systems.
RPM's Q1 report may have contained some weaknesses. However, investors had already anticipated this ahead of time, making the silver linings from the quarter that much brighter and ultimately fueling all-time highs in the stock today.
NIKE gets sacked as gloomy Q1 report shows that comeback effort just became more daunting (NKE)
In NIKE's (NKE) pursuit of a comeback, the scoreboard is looking even more daunting today after the company's weak earnings report showed that it fumbled the ball once again in 1Q25. While NKE cleared EPS estimates for the fifth consecutive quarter, thanks to its cost-cutting efforts and a 120-bps yr/yr improvement in gross margin, sales fell by 10.4% to $11.59 bln, missing expectations and representing its worst sales decline since the pandemic-impacted quarter of 4Q20.
Furthermore, the company punted on providing an updated outlook for FY25, citing the upcoming CEO transition on October 14 as the reason why, suggesting that its prior guidance of a mid-single-digit sales decline is looking out of reach. Indeed, if NKE's downside Q2 revenue guidance for a decline of 8-10% is accurate, then an improbably strong 2H25 would be needed to attain that mid-single-digit decline this fiscal year.
- Unfortunately, the weakness wasn't limited to a single area within the business. Most notably, the core North America market took a turn for the worse as revenue decreased by 11% compared to last quarter's more modest 1% dip. The downturn points to even greater share losses to competitors such as Deckers' (DECK) HOKA and On Holdings (ONON), both of which are expected to report double-digit sales growth in their next earnings reports.
- A cornerstone of outgoing CEO John Donahoe's strategy was to build up NKE's direct-to-consumer (DTC) business, which played out perfectly in 2H20 and CY21 as the pandemic drove consumers to its digital channels. However, as the world began to normalize in 2022 and thereafter, NKE was slow to readjust and lost its footing on the product innovation side. Consequently, the robust growth seen 3-4 years ago has vanished, as illustrated by the 13% drop in NIKE Direct revenue this quarter.
- The situation isn't much better on the wholesale side with revenue falling by 8% to $6.4 bln. A byproduct of NKE's strategy to focus on the DTC business was that an opening was created for competitors to grab the shelf space that NKE vacated with new products. One of the main reasons why shares of NKE rallied after announcing the CEO transition on September 19 is the belief that newly appointed CEO Elliot Hill, who previously served as the company's President of Consumer and Marketplace, can rebuild its retailer partnerships.
- Positives were few and far between, but one bright spot was the disclosure that sales of NKE's newer products grew by double-digits in Q1, providing an encouraging data point that its early innovation efforts are starting to pay off. Relatedly, CFO Matthew Friend commented that he's seeing indications of a slight second half improvement in revenue trends versus the first half.
The main takeaway is that NKE's disappointing earnings report provided a painful reality check that it has a long way to go to reach the goal line in its comeback attempt. While we do believe that Mr. Hill is a solid choice to quarterback this comeback, investors should anticipate a methodical and time-consuming approach that could take several quarters to play out.
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