Market Snapshot
briefing.com
| Dow | 34057.78 | -96.11 | (-0.28%) | | Nasdaq | 12994.99 | -107.52 | (-0.82%) | | SP 500 | 4285.12 | -20.15 | (-0.47%) | | 10-yr Note |
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| | NYSE | Adv 618 | Dec 2496 | Vol 775 mln | | Nasdaq | Adv 1133 | Dec 3244 | Vol 5.1 bln |
Industry Watch
| Strong: Energy |
| | Weak: Consumer Discretionary, Materials, Communication Services, Industrials, Real Estate |
Moving the Market
-- Feeling market is due to pullback from recent gains
-- Underwhelming earnings reports from leading retailers
-- Rising Treasury yields
-- Broad based selling interest
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Closing Summary
17-Aug-22 16:25 ET
Dow -171.69 at 33982.20, Nasdaq -164.43 at 12938.08, S&P -31.16 at 4274.11
[BRIEFING.COM] The stock market opened on a weak note with broad-based selling amid mixed earnings reports from leading retailers and hesitation ahead of the July 26-27 FOMC Minutes release. Immediately after the release, the major indices hit their intraday highs before falling from those levels and moving sideways into the close.
The market hit its intraday highs after the FOMC Minutes as participants focused on the acknowledgment that it would be appropriate to moderate the pace of rate hikes in the future to assess the impact of increases that have already been made. That said, the Minutes also showed that officials continue expecting ongoing increases to the fed funds rate. Also, policymakers believe that the bulk of the effects from higher rates have yet to be felt due to the transmission lag.
The major indices quickly fell from those highs to roughly the same levels they were at before the release. Broad-based selling left the S&P 500 and Nasdaq Composite in negative territory week-to-date while the Dow Jones Industrial Average held onto a modest gain on the week.
The selling efforts left the Vanguard Mega Cap Growth ETF (MGK) and Invesco S&P 500 Equal Weight ETF (RSP) both down 0.9% versus a 0.7% loss in the S&P 500. The Russell 3000 Growth Index and Russell 3000 Value Index both lost 0.9% on the day. Also, market breadth showed a strong skew towards declining issues. Decliners led advancers by a 4-to-1 margin at the NYSE and a roughly 3-to-1 margin at the Nasdaq.
Semiconductors were notably weak with the PHLX Semiconductor Index closing down 2.5%. Components sold off after Analog Devices (ADI 170.13, -8.91, -5.0%) acknowledged that it saw orders moderate late in its fiscal third quarter. Thanks to its lagging semiconductor related constituents, the information technology sector closed down 0.7%.
Many retailers sold off today after Target (TGT 175.34, -4.85, -2.7%) reported worse-than-expected quarterly results. The SPDR S&P Retail ETF (XRT) closed down 2.9%. The weakness here weighed on the consumer discretionary sector's (-1.1%) performance despite earnings-driven gains in retail peers TJX (TJX 68.54, +1.89, +2.8%) and Lowe's (LOW 215.37, +1.25, +0.6%).
Energy (+0.8%) was the only S&P 500 sector to close in the green thanks to higher oil prices. WTI crude oil futures rose 2.0% to $87.97/bbl.
Treasury yields made big upside moves partly due to the UK reporting a 40-year high consumer inflation rate in July (+10.1% year-over-year) ahead of the open. They fell somewhat after the FOMC Minutes release with the 2-yr note yield settling up three basis points to 3.27% while the 10-yr note yield rose seven basis points to 2.89%.
Earnings reports ahead of tomorrow's open are headlined by BJ's Wholesale (BJ), Kohl's (KSS), and Estee Lauder (EL).
Looking ahead to Thursday, market participants will receive the weekly initial jobless claims (Briefing.com consensus 266,000; prior 262,000) and continuing claims (prior 1.428 million) and the August Philadelphia Fed Index (Briefing.com consensus -4.0; prior -12.3) at 8:30 a.m. ET, the July Existing Home Sales (Briefing.com consensus 4.85 million; prior 5.12 million) and Leading Economic Index (prior -0.8%) at 10:00 a.m. ET, and weekly EIA Natural Gas Inventories (prior +44 bcf) at 10:30 a.m. ET.
Reviewing today's economic data:
- Total retail sales were flat month-over-month in July (Briefing.com consensus +0.2%), dragged down by declines in motor vehicle sales (-1.6%), gasoline station sales (-1.8%), and general merchandise sales (-0.7%). Excluding autos, retail sales were up 0.4% (Briefing.com consensus +0.1%).
- The key takeaway from the report is the recognition that consumer spending persisted in July across most discretionary categories, aided presumably by some relief in falling gas prices.
- Weekly MBA Mortgage Applications Index fell 2.3% after last week's 0.2% increase.
- June Business Inventories rose 1.4% (Briefing.com consensus 1.5%) versus the prior revised increase of 1.6% (from 1.4%).
- Crude oil inventories had a draw of 7.056 mln barrels
- Prior week showed a build of 5.45 mln barrels
- Gasoline inventories had a draw of 4.642 mln barrels
- Prior week showed a draw of 4.98 mln barrels
Dow Jones Industrial Average: -6.5% YTD
S&P 400: -8.5% YTD
S&P 500: -10.3% YTD
Russell 2000: -11.5% YTD
Nasdaq Composite: -17.3% YTD
Market moves sideways into the close
17-Aug-22 15:30 ET
Dow -162.77 at 33991.12, Nasdaq -148.10 at 12954.41, S&P -28.01 at 4277.26
[BRIEFING.COM] The market is moving sideways into the close.
After the close, Cisco (CSCO), Amcor (AMCR), and Bath & Body Works (BBWI) are all set to report earnings.
Earnings reports ahead of tomorrow's open are headlined by BJ's Wholesale (BJ), Kohl's (KSS), and Estee Lauder (EL).
Looking ahead to Thursday, market participants will receive the weekly initial jobless claims (Briefing.com consensus 266,000; prior 262,000) and continuing claims (prior 1.428 million) and the August Philadelphia Fed Index (Briefing.com consensus -4.0; prior -12.3) at 8:30 a.m. ET, the July Existing Home Sales (Briefing.com consensus 4.85 million; prior 5.12 million) and Leading Economic Index (prior -0.8%) at 10:00 a.m. ET, and weekly EIA Natural Gas Inventories (prior +44 bcf) at 10:30 a.m. ET.
Market falls from intraday highs
17-Aug-22 15:00 ET
Dow -96.11 at 34057.78, Nasdaq -107.52 at 12994.99, S&P -20.15 at 4285.12
[BRIEFING.COM] The major indices fell from their post-FOMC Minutes highs recently but remain well off session lows.
The growth stocks are driving the recent uptick. The Russell 3000 Growth Index (-0.2%) shows a more modest loss than the Russell 3000 Value Index (-0.5%).
Also, market breadth shows decliners leading advancers by a roughly 3-to-1 margin at the NYSE, versus 5-to-1 earlier, and a 5-to-2 margin at the Nasdaq, versus 3-to-1 earlier.
Separately, the CBOE VIX Index fell sharply after the FOMC Minutes release, down 0.5% or 0.13 to 19.56.
FOMC Minutes imply more tightening ahead
17-Aug-22 14:30 ET
Dow -92.50 at 34061.39, Nasdaq -110.42 at 12992.09, S&P -18.71 at 4286.56
[BRIEFING.COM] The major averages moved higher initially following the release of the FOMC's July policy meeting minutes which showed that all participants agreed that it was appropriate to raise the target range for the federal funds rate 75 basis points. The benchmark S&P 500 (-0.43%) is down now just 18 points.
Notably, some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent.
Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation. Participants agreed that there was little evidence to date that inflation pressures were subsiding.
Among other key excerpts from the minutes, participants remarked that the strength of the labor market suggested that economic activity may be stronger than implied by the current GDP data, with several participants raising the possibility that the discrepancy might ultimately be resolved by GDP being revised upward.
Gold falls ahead of FOMC
17-Aug-22 13:55 ET
Dow -152.37 at 34001.52, Nasdaq -159.39 at 12943.12, S&P -28.97 at 4276.30
[BRIEFING.COM] With about two hours to go the tech-heavy Nasdaq Composite (-1.22%) holds a decent "lead" among its counterparts for today's worst declines.
Gold futures settled $13.00 lower (-0.7%) to $1,776.70/oz, pressured by gains in the dollar and treasury yields ahead of the FOMC's minutes from its July meeting, which are due at the top of the hour.
Meanwhile, the U.S. Dollar Index is up approx. +0.3% to $106.76.
Analog Devices' broad-based strength in Q3 is overshadowed by management's cautious commentary (ADI)
Analog Devices (ADI -5%) powers down despite posting beats on its top and bottom lines in Q3 (Jul). The semiconductor manufacturer, specializing in analog, mixed-signal, and digital signal processing, posted broad-based growth despite a tricky macroeconomic environment, with meaningful strength in its Industrial and Automotive segments, mirroring recent results from Texas Instruments (TXN) and Qorvo (QRVO).
However, management's color on the state of the economy was not exactly cheerful, noting that economic conditions are starting to ding demand as orders slowed late in Q3 and cancellations increased slightly. For example, even though ADI's backlog increased to a new record in Q3, stretching well into mid-2023, its book-to-bill fell sequentially. The volatile and uncertain environment shows up in the company's Q4 (Oct) guidance, which was just in-line with consensus despite the outperformance in Q3.
- Adjusted EPS and revenue growth soared by 41.3% and 76.8% yr/yr, respectively, as operating margins expanded by 650 bps yr/yr to 50.1%, and each segment saw growth of at least 55%.
- Bucking the trend of softening consumer demand documented recently by peers NXP Semi (NXPI) and Advanced Micro (AMD), ADI's Consumer segment saw the biggest sales jump at 136% yr/yr. The massive growth in this segment can be chalked up to ADI's move toward the higher end of the market, which has been better shielded from demand pressures. More specifically, growing demand across portables and longer life cycle applications fueled growth in the quarter.
- Meanwhile, emulating robust figures from industry peers, Industrial and Automotive sales were exceptional, growing 55% and 127% in Q3. The more than doubling of revenue in Automotive sales was primarily due to a better mix of higher-content premium vehicles.
- ADI's final segment, Communications, grew 69% yr/yr, driven by wireless and wireline sales. Demand continued to accelerate for ADI's optical and power portfolios as telecoms and hyperscalers poured capital into meeting an ongoing need for data.
The main takeaway in Q3 is that ADI proved again to be a powerhouse, posting considerable growth across each of its segments, fueled by its excellent product and customer diversification. However, investors are not showing their excitement for ADI's consistency but instead zeroing in on management's commentary, which turned significantly more cautious in Q3 compared to Q2 (Apr). Still, ADI's portfolio stacks up nicely against current economic headwinds. The company also remains confident in achieving its annualized long-term revenue target of +7-10%.
Krispy Kreme can't glaze over weak Q2 results and outlook as demand softens and costs rise (DNUT)
Krispy Kreme's (DNUT) Q2 report was hard for investors to digest as the donut maker missed earnings and revenue expectations, while lowering its FY22 EPS and revenue guidance. With consumers looking to tighten their belts in an inflationary environment, an easy target to rein in expenses is that extra trip to grab donuts or coffee. This is evidenced by DNUT's weekly sales per Delivered Fresh Daily Door decelerating to growth of 9% from 27% last quarter. A similar scenario played out for coffee and energy beverage maker Dutch Bros. (BROS), which also missed Q2 EPS expectations and posted a same shop sales decline of 3.3%.
On the cost side of the equation, DNUT grappled with higher labor and commodity costs, causing adjusted EBITDA to contract by 240 bps yr/yr to 12.6%. The company has taken pricing actions across its menu, but that wasn't enough to offset the rising costs. Furthermore, the efficiencies that DNUT experienced last quarter, which drove a 30 bps improvement in operating margin, evaporated in Q2 as total sales growth slowed to 7.5% from 15.8%.
If that wasn't enough for DNUT to contend with, foreign exchange headwinds also hurt its results and outlook. Specifically, a stronger U.S. dollar negatively impacted adjusted EBITDA by $2.7 mln. In addition to softer consumer spending, unfavorable foreign exchange impacts are expected to knock $0.05/share off DNUT's EPS for FY22. However, even if the negative effect of foreign exchange is excluded, the company's FY22 EPS guidance would still fall below expectations.
There were a couple sweet spots within the earnings report, though.
- Sales per Hub in the U.S and Canada increased by 22% yr/yr to $4.4 mln, fueled by a 19% increase in Global Points of Access (defined as any location where its products can be purchased). The growth shows that its strategy to expand its distribution through bakeries, grocery stores, and food carts, is still working.
- DNUT stated that it has seen a "significant deceleration in key commodity costs for 2023 in recent weeks." Along with another round of menu price increases that went into effect at the end of Q2, the decline in commodity prices positions DNUT for margin expansion and earnings growth next year.
The main takeaway is that DNUT was especially vulnerable to a pullback in discretionary spending, and that situation indeed unfolded during Q2. In this softer consumer spending environment, the company was unable to take a more aggressive approach with price increases, which, in turn, applied pressure on its margins. The silver lining is that conditions seem to be improving for the latter half of the year as commodity prices ease, but that's doing little to appease investors today.
Target employed the Band-Aid approach to aggressively clear excess inventory (TGT)
Target (TGT -3%) certainly did not post as strong of Q2 (Jul) results as Walmart (WMT) did yesterday. Margins took a big hit because Target basically ripped off the Band-Aid in terms of clearing inventory. However, despite the near term pain, we think that was the right decision. Also, there were some other good things about the report and we think that is why the stock is holding up well despite the big EPS miss.
- Target noted on its last call that it had bloated inventory levels as consumer demand patterns changed. In response, Target made the decision to aggressively discount merchandise in JulQ to clear it out of the way. This caused operating margin to fall to just 1.2% from 9.8% a year ago and it was below even its recently lowered guidance of 2%. This was the main reason why EPS missed badly.
- While this decision caused near term financial pain, Target argues that the alternative would have been worse. It could have held on to excess inventory and deal with it slowly, over multiple quarters or even years. According to the company, that would have cluttered sales floors and hampered its ability to present new, fresh, and fashionable items. Besides the sales floor, it also would have burdened its supply chain and caused employees to work around it day after day.
- The good news is that the vast majority of the financial impact of these inventory actions is now behind it. And Target reaffirming its 2H operating margin guidance of 6% is good evidence of that. Target is now in a much better position heading into the fall, which includes the key seasons of back-to-school and Halloween. It also allows TGT to have better in-stock positions in categories that are growing, most notably, in Food & Beverage, Beauty and Essentials.
- Same store comps at +2.6% were slightly below Street estimates, which was a little bit of a surprise as the discounting actually probably boosted comps. However, analysts likely already factored that in. Overall, comps were generally in-line.
Overall, we like the Band-Aid approach that Target took this quarter. EPS and margins took a big hit, but it is better to get it out of the way and move on. Walmart also discounted in JulQ, but listening to the two calls, we get the sense that Target was more aggressive on discounting but we have no hard data on that. The silver lining in this report is Target reaffirming 2H revenue and especially operating margin guidance. The latter is good evidence that the lion's share of the discounting is now done.
Lowe's moving higher despite comp decline and sales miss as focus remains on the bottom-line (LOW)
A day after Home Depot (HD) set an upbeat tone for Lowe's (LOW) Q2 earnings report, the home improvement chain reported mixed results, including a surprise drop in comparable sales of -0.3%. Despite the decline in comps and a miss on the top-line, the initial reaction to the report was positive -- although, shares have since given up some of those after-hour gains.
At first glance, this favorable reception of LOW's report looks somewhat surprising, especially since the company ratcheted its FY23 sales and comparable sales outlook lower. The company now expects sales and comps to come in toward the bottom of its prior guidance ranges of $97-$99 bln, and -1% to +1%, respectively.
However, in a market environment in which a premium is placed on margins and profitability, LOW's earnings report and outlook begin to look much better.
- With this morning's EPS beat, LOW has now surpassed earnings expectations for thirteen consecutive quarters. In Q2, LOW leaned on solid cost management to drive a 10% increase in non-GAAP EPS. As a percentage of revenue, SG&A costs decreased slightly to 16.2% from 17.0% in the year-earlier quarter.
- That modest drop in SG&A expense was enough to nudge operating margin higher by 12 bps yr/yr to 15.39%, even as sales slipped by 0.3% to $27.5 bln.
- Although sales fell short of expectations, the miss probably doesn't come as a major surprise to investors. Ahead of the print, evidence was building that do-it-yourself (DIY) home improvement spending was slowing. For instance, customer transactions at HD fell by 3% in Q2, representing the company's fifth straight quarter of declines. Prior to HD's report, paint company Sherwin-Williams (SHW) reported weak Q2 results with management blaming softer-than-expected sales from the DIY market.
- In the earnings press release, LOW CEO Marvin Ellison acknowledged that the Q2 results were negatively impacted by the company's 75% DIY customer mix. Lower demand for certain discretionary products weighed on sales. During HD's earnings call, the company singled out grills, fertilizers, and mowers as a few categories that were particularly weak.
- LOW's "Total Home Strategy", which it rolled out in December 2020, is paying dividends. A core facet of this strategy includes the prioritization of the professional segment -- an area that HD has traditionally dominated. Pro customer sales jumped by double digits for the ninth consecutive quarter, growing by 13% in Q2.
- After HD disclosed that inventories climbed by an alarming 35% this quarter, all eyes were on LOW's inventory number. To investors' relief, the company managed inventory quite well with inventory up a manageable 11.5% to $19.3 bln, Accordingly, concerns that LOW will need to be more promotional in 2H23 were eased this morning.
Due to LOW's inventory management, cost control efforts, and productivity initiatives, the company now believes that FY23 EPS will come in at the high end of its $13.10-$13.60 guidance range.
Overall, LOW's earnings report was less-than-spectacular as consumers are clearly pulling back spending on smaller DIY projects. The name of the game in this market, though, is containing costs and driving stronger productivity to enhance profitability. On that measure, LOW scores high marks as it exceeded EPS expectations again and lifted its FY23 EPS expectations higher.
TJX's positive apparel comps could not overcome lagging HomeGoods sales in JulQ (TJX)
After Walmart (WMT) rang the alarm on softening apparel sales last month due to inflationary pressures, there was a concern that off-price department chain TJX (TJX), which derived 47% of its total FY22 sales from clothing and footwear, would struggle in Q2 (Jul). However, although TJX missed revenue estimates in the quarter, it was largely due to softness in its home category. In fact, within its overall apparel business, comp sales were slightly positive each month in JulQ.
We noted last week that after strong JunQ numbers from second-hand fashion platform Poshmark (POSH), which signaled that consumers were beginning to trade down, TJX was positioned to buck the trend seen by WMT, given its discounted prices. While this materialized, the declining sales growth within TJX's HomeGoods segment, as well as light sales in other categories within the Marmaxx segment, weighed on overall comp growth in the quarter.
- U.S. same-store sales fell by 5% in Q2, coming up just short of TJX's prior expectations of negative 1% to 3%, while overall revs dropped 1.9% yr/yr to $11.84 bln.
- On the bright side, TJX's open-only comparable store sales did meet previous guidance of +21%.
- Marmaxx, which includes the T.J. Maxx, Marshalls, and Sierra banners, saw comps fall by 2%, while HomeGoods, which includes HomeGoods and Homesense stores, experienced negative 13% comp growth.
- Weak HomeGoods comps follow in the footsteps of other home goods retailers, like Wayfair (W), which noticed discretionary dollars flowing away from goods toward services.
- Furthermore, WMT noted it is focused on reducing exposure to its home category. At the same time, Target (TGT) stated today that its home category saw a low single-digit decline yr/yr despite encouraging early results in back-to-school goods.
- Another highlight was TJX's adjusted EPS of $0.69, which was at the high end of its prior forecast of $0.65-0.69. However, the company tends to guide each quarter conservatively, so this positive is not standing out that strongly. Meanwhile, TJX's Q3 (Oct) earnings guidance was below consensus, while its Q4 (Jan) outlook merely met expectations, setting FY23 up for adjusted EPS of $3.06-3.14, falling just short of estimates.
- TJX also trimmed its FY23 same-store sales outlook to a decrease of 2% to 3% from its previous projection of an increase of +1-2%.
Overall, while TJX bucked the sliding apparel sales trend seen by WMT as well as TGT today, the shift away from more discretionary home goods weighed on its JulQ results. Nevertheless, as today's relatively muted price reaction indicates, investors remain optimistic that TJX will be a go-to retailer during the current inflationary environment. Its off-price business model bodes well for consumers looking for good deals without sacrificing style and design.
On a final note, TJX's solid apparel comps are a bullish sign for its competition, such as Ross Stores (ROST), which reports after-market tomorrow, and Nordstrom (JWN), where its off-price banner, Nordstrom Rack, totaled 34% of AprQ sales.
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