Market Snapshot
briefing.com
| Dow | 32931.90 | -133.59 | (-0.40%) | | Nasdaq | 12416.18 | +34.65 | (0.28%) | | SP 500 | 4135.88 | -2.18 | (-0.05%) | | 10-yr Note |
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| | NYSE | Adv 1476 | Dec 1600 | Vol 753 mln | | Nasdaq | Adv 2124 | Dec 2233 | Vol 3.7 bln |
Industry Watch
| Strong: Energy, Materials, Consumer Discretionary, Industrials |
| | Weak: Health Care, Utilities, Consumer Staples, Real Estate |
Moving the Market
-- Waiting game ahead of Fed Chair Powell's speech at the Jackson Hole Economic Policy Symposium Friday
--Rising oil costs stoking fears of more persistent inflation
-- 10-yr note yield above 3.00%
-- Relatively weak mega caps
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Closing Summary
23-Aug-22 16:25 ET
Dow -154.02 at 32911.47, Nasdaq -0.27 at 12381.26, S&P -9.26 at 4128.80
[BRIEFING.COM] Today's trade was marked by a lack of conviction on either side of the tape. The major indices could not escape their narrow trading ranges and closed with modest losses. Market participants were playing a waiting game ahead of Fed Chair Powell's speech at the Jackson Hole Economic Policy Symposium on Friday. The 10-yr note yield remaining above 3.00%, rising oil prices, and a weak July new home sales report also acted as limiting factors today.
Market breadth reflected the general lack of conviction with advancers roughly in line with decliners at both the NYSE and Nasdaq at the close.
Mixed action left mega caps in line with the broader market while growth stocks were in line with value stocks. The Vanguard Mega Cap Growth ETF (MGK), Invesco S&P 500 Equal Weight ETF (RSP), and S&P 500 all closed with a modest loss. The Russell 3000 Growth Index and the Russell 3000 Value Index both closed little changed on the day.
Notably, small caps fared somewhat better than their peers. The Russell 2000 closed with a 0.3% gain.
Energy was the only area of the market with concerted buyer interest. The S&P 500 energy sector closed way ahead of the broader market, up 3.6%. It was boosted by an upside move in WTI crude oil futures ($93.76, +3.13, +3.5%) following reports that suggested OPEC+ is likely to cut production or reduce the rate of its production increase at, or before, its September 5 meeting.
On the flip side, natural gas futures started the day higher but saw a sharp downside move following an update from Freeport LNG. The company is anticipating its liquefaction facility will be at full capacity by March 2023 with initial production starting mid-November. Natural gas futures settled 5.0% lower at $9.25/mmbtu.
Treasury yields made big downside moves after the weak economic data this morning but did not maintain that downward momentum. The 10-yr note yield, which was at 3.07% before the data, fell to 2.99% but settled the day at 3.05%. The 2-yr note yield was at 3.32% ahead of the reports, but settled at 3.28%.
Economic data tomorrow includes:
- Weekly MBA Mortgage Applications Index (prior -2.3%) at 7:00 a.m. ET
- July Durable Orders (Briefing.com consensus 0.6%; prior 1.9%) and Durable Orders, Ex-Transportation (Briefing.com consensus 0.1%; prior 0.3%) at 8:30 a.m. ET
- July Pending Home Sales (Briefing.com consensus -3.0%; prior -8.6%) at 10:00 a.m. ET
- Weekly EIA Crude Oil Inventories (prior -7.056M) at 10:30 a.m. ET
Reviewing today's economic data:
- New home sales declined 12.6% month-over-month in June to a seasonally adjusted annual rate of 511,000 units (Briefing.com consensus 580,000) from a downwardly revised 585,000 (from 590,000) in June. On a year-over-year basis, new home sales were down 29.6%.
- The key takeaway from the report is that it reflects the adverse impact of rising mortgage rates and high home prices on overall demand. That impact is evident in the increased supply of new homes for sale, the shrinking percentage of new homes sold for $399,999 or less, and the significant decline in new home sales on a year-over-year basis.
- The August IHS Markit Manufacturing PMI preliminary reading was 51.3 versus a prior reading of 52.2.
- The August IHS Markit Services PMI preliminary reading was 44.1 versus the prior reading of 47.3.
Dow Jones Industrial Average: -9.4% YTD
S&P 400: -11.3% YTD
S&P 500: -13.4% YTD
Russell 2000: -14.5% YTD
Nasdaq Composite: -20.9% YTD
Market sticks to narrow range into the close
23-Aug-22 15:25 ET
Dow -114.73 at 32950.76, Nasdaq +29.98 at 12411.51, S&P -1.97 at 4136.09
[BRIEFING.COM] Heading into the close, the major indices are confined to a narrow range.
After the close, Nordstrom (JWN), Advance Auto (AAP), Toll Brothers (TOL), Intuit (INTU), and Urban Outfitters (URBN) are set to report earnings.
Earnings reports ahead of Wednesday's open include Petco (WOOF) and II-VI (IIVI).
Economic data tomorrow includes:
- Weekly MBA Mortgage Applications Index (prior -2.3%) at 7:00 a.m. ET
- July Durable Orders (Briefing.com consensus 0.6%; prior 1.9%) and Durable Orders, Ex-Transportation (Briefing.com consensus 0.1%; prior 0.3%) at 8:30 a.m. ET
- July Pending Home Sales (Briefing.com consensus -3.0%; prior -8.6%) at 10:00 a.m. ET
- Weekly EIA Crude Oil Inventories (prior -7.056M) at 10:30 a.m. ET
Market remains in narrow range
23-Aug-22 15:00 ET
Dow -133.59 at 32931.90, Nasdaq +34.65 at 12416.18, S&P -2.18 at 4135.88
[BRIEFING.COM] The market moved laterally the last half hour.
Natural gas futures saw a reversal in price action after the Freeport LNG update, down 4.3% $9.26/mmbtu and near the lows of the day. Meanwhile, WTI crude oil futures are hanging just below session highs, up 3.6% to $93.61/bbl. Unleaded gasoline futures are up 1.4% to $2.93/gal.
The 10-yr note yield is near its intraday high, up one basis point to 3.05%. The 2-yr note yield is down five basis points to 3.29%.
Twitter underperforms after whistleblower report; energy names outperform in S&P 500
23-Aug-22 14:30 ET
Dow -126.06 at 32939.43, Nasdaq +40.90 at 12422.43, S&P -1.79 at 4136.27
[BRIEFING.COM] The benchmark S&P 500 (-0.04%) is still in second place on Tuesday afternoon, hovering near flat lines in recent action.
S&P 500 constituents Twitter (TWTR 40.68, -2.33, -5.42%), Vertex Pharma (VRTX 284.46, -9.38, -3.19%), and UDR (UDR 46.42, -1.32, -2.76%) dot the bottom of today's standings. TWTR slips in part due to a whistleblower report published by CNN alleging the company's lackadaisical cyber security policies posed threats to users, shareholders, and national security alike, while VRTX caught a large sale from ARK Invest, and UDR shows modest weakness, alongside other real estate names, after this morning's new home sales miss.
Meanwhile, Occidental Petroleum (OXY 73.82, +4.79, +6.94%) stands atop the index amid broader strength in the energy complex.
Gold snaps losing streak on down dollar
23-Aug-22 14:00 ET
Dow -161.34 at 32904.15, Nasdaq +11.52 at 12393.05, S&P -7.35 at 4130.71
[BRIEFING.COM] With about two hours to go on Tuesday the tech-heavy Nasdaq Composite (+0.09%) remains atop the standings.
Gold futures settled $12.80 higher (+0.7%) to $1,761.20/oz, snapping a six-session skid on a weaker greenback.
Meanwhile, the U.S. Dollar Index is down about -0.4% to $108.57.
J.M Smucker spreads on another earnings beat, fueled by strong pricing power and brand loyalty (SJM)
J.M. Smucker (SJM) may be getting sandwiched between inflationary pressures and the ongoing impact from its Jif peanut butter recall, but that didn't prevent the company from posting a solid beat-and-raise quarterly report. The packaged food company, which owns other well-known brands like Folgers coffee, Smucker's Jam, and Milk-Bone dog treats, navigated around these headwinds by implementing price increases across its portfolio. SJM's ability to raise prices is a reflection of the durability of the eat-at-home trend. It also highlights a healthy degree of brand loyalty since consumers could easily trade down to lower-cost private label brands.
Despite the challenges facing SJM, expectations were still relatively high heading into the print, as illustrated by the stock's 12% run higher since late June. Raising the bar for the company was a strong earnings report from General Mills (GIS) on June 29, followed by a beat-and-raise report from Kellogg (K) on August 4. The results from those two competitors confirmed that the eat-at-home movement was alive and well. Additionally, the impressive performance of GIS's Blue Buffalo Pet segment, which generated organic sales growth of 22%, provided a bullish signal for SJM.
- SJM's Retail Pet Foods segment is currently the company's largest business at 39% of total 1Q23 net sales. In this inflationary environment, that works in SJM's favor because pet owners are willing to absorb higher prices for their pets. Accordingly, the Retail Pet Foods segments posted net sales growth of 13%, while segment profit margin expanded by 420 bps yr/yr to 16.5%.
- Higher net price realization increased net sales by 20 percentage points, more than offsetting a 3-percentage point drop in volume/mix.
- Across the entirety of the business, volume/mix slid by 9 percentage points, resulting in SJM's top-line growing by a paltry 0.8% to $1.87 bln. This volume/mix decline is attributable to the Jif peanut butter recall from last May, which also resulted in manufacturing downtime and production inefficiencies. Consequently, non-GAAP gross margin contracted by 340 bps yr/yr to 31.4%.
- The Jif recall is wreaking havoc on the U.S. Retail Consumer Foods segment. Net sales plunged by 29% to $311.1 mln and segment profit margin collapsed by 960 bps yr/yr to 17.6%. Unfortunately, SJM expects the recall to impact its results for the remainder of the fiscal year, even though it resumed manufacturing of Jif products at the affected Lexington facility in June.
- However, since the issues revolving around the recall are already well-known, many investors are looking beyond this issue. Instead, SJM's better-than-expected bottom-line performance and the accompanying improved FY23 guidance are the main focal points. The company now expects to generate EPS of $8.20-$8.60 and net sales growth of 4-5%, compared to its prior forecast of $7.85-$8.25, and 3.5-4.5%, respectively.
- Along with positive net price realizations, especially in the pet food business, SJM's earnings are benefiting from solid expense management in a rising cost environment. In Q1, Marketing expenses declined to 5.1% of total sales from 5.3% in the year-earlier quarter. Total sales were up a manageable 6% yr/yr to $343.8 mln.
The main takeaway is that SJM is displaying solid pricing power, which showcases the strength of the company's brands and enables it to overcome rising commodity costs. With the Jif peanut butter recall still battering the retail foods business, SJM is far from firing on all cylinders. As the impact of the recall gradually subsides, though, SJM's earnings performance looks poised to substantially improve as the eat-at-home trend continues, and as strength in the pet food category fuels its growth.
Macy's shares are blooming today on better-than-feared JulQ results (M)
Following peer Kohl's (KSS) earnings miss and trimmed FY23 guidance last week, shares of Macy's (M +4%) traded lower in sympathy. However, because expectations were low ahead of the Macy's Q2 earnings report today, the department store chain's earnings and sales outperformance is helping the stock bloom today. Macy's did follow in KSS's footsteps by trimming its FY23 earnings and revenue projections. However, its slashed earnings forecast was less pronounced than KSS's. Meanwhile, Macy's reduced FY23 revenue forecast was still in-line with consensus.
- It is no surprise that inflation is dampening consumer sentiment, particularly in the apparel category, which showed up in Macy's Q2 results. Adjusted EPS took a 22.5% tumble yr/yr to $1.00 while revs dipped 0.8% to $5.6 bln and comparable sales declined 1.5% on an owned basis. However, Macy's still topped analyst estimates across each metric.
- Although consumers are choosing to spend more on travel, highlighted by record numbers recently from travel firm Airbnb (ABNB), they are also shifting their dollars toward events and dining out. This is fueling continued strength in occasion-based categories, consisting of tailored sportswear, shoes, and dresses.
- Still, pandemic-related categories, such as casual and sleepwear apparel, weighed on Macy's top line in the quarter.
- Along with occasion-based products performing well, Macy's off-price offerings, Backstage and Bloomingdale's Outlet, also saw solid performance during the quarter, with Backstage posting flat same-store sales.
- Coupling Macy's off-price performance with strong numbers from TJX (TJX) bodes well for Nordstrom (JWN), which reports JulQ numbers today after the close. JWN's off-price banner, Nordstrom Rack, totaled 34% of AprQ sales.
- It is also worth noting that Macy's did not see trade down at Bloomingdale's, which boasts a more affluent customer base.
- Still, a key issue that weighed on sales was too much inventory, which forced Macy's to aggressively implement markdowns to drive faster sell-throughs. By marking down products, merchandise margins contracted 160 bps yr/yr. Macy's noted that most markdowns occurred within pandemic-related categories and seasonal goods. Still, the company will continue this strategy as it targets appropriate inventory levels by the end of the year.
- With markdowns ongoing and inflationary risks persisting, Macy's lowered its FY23 outlook, expecting adjusted EPS of $4.00-4.20, down from $4.53-4.95, and revs of $24.34-24.58 bln, a slight drop-off from $24.46-24.70 bln.
Nevertheless, Macy's Q2 results were better-than-expected, especially after KSS's disappointing JulQ numbers affirmed what Walmart (WMT) was witnessing with softening apparel sales. Although risks still linger for the department store chain, especially if inflationary pressures do not begin to subside, its Q2 results are an encouraging sign that the company can successfully navigate the current tricky environment.
Dick's Sporting Goods swims against the inflationary current in Q2 delivering a beat-and-raise (DKS)
Swimming against the strong current of an inflation-driven shift away from spending on discretionary goods, Dick's Sporting Goods (DKS +1%) posted beats on its top and bottom lines in Q2 (Jul) and raised its FY23 earnings and same-store sales guidance nicely. Incorporating today's favorable reaction, shares of the sporting goods retailer are now turning positive on the year after ascending roughly 55% from May lows.
Leading into DKS's upbeat Q2 earnings report, there were plenty of warning signs that sporting goods were experiencing softness in the wake of high inflation. Big 5 Sporting Goods (BGFV) noted earlier this month that sales in specific categories are softer than anticipated. Also, Walmart (WMT) mentioned that it was focused on reducing exposure to areas such as home and sporting goods during its JulQ earnings call last week. Furthermore, supply chain issues were improving but were still not fully resolved. BGFV stated it was still working through persistent supply chain hiccups in JulQ, while V.F. Corp (VFC), which owns the North Face banner, discussed in late July that although supply chains were improving in JunQ, they were nowhere near pre-pandemic levels.
Considering these headwinds explains why DKS is racking up a higher score today despite shares already running up significantly over the past few months.
- With DKS still lapping unfavorable numbers from last year, its headline results in Q2 stand out nicely. Adjusted EPS fell less than analysts anticipated yr/yr paving the way for DKS's ninth-straight double-digit beat. Likewise, sales may have declined 5% yr/yr to $3.11 bln, but it was more than enough to topple estimates. Same-store sales dropping 5.1% also beat consensus and shined when considering the tough +20.2% comp from the year-ago period.
- DKS was mostly bullish on the call, stating that its inventory was healthy, with improved in-stock levels in key categories. Its customer success metrics, such as retention, repeat purchasing, and omnichannel behavior, were all elevated compared to pre-pandemic levels. Meanwhile, merchandise margins were up over 400 bps compared to 2019. Looking ahead, DKS is confident that merchandise margins will be meaningfully higher than pre-pandemic levels.
- Additionally, echoing the sentiment many of its retail peers felt, DKS noted that it is excited about its assortment for the back-to-school season. When combining what looks to be another solid back-to-school year with yr/yr comparisons beginning to ease, DKS's upcoming quarters are shaping up nicely.
- This shows up in DKS's raised FY23 guidance. The company expects adjusted EPS of $10.00-12.00, up from $9.15-11.70, and comps to range from (6%) to (2%), an increase at the low-end of its prior range of (8%) to (2%). Although DKS's outlook is still below its initial forecast outlined in March, the market was likely expecting DKS to have to trim its projections as it did in Q1 (Apr), so the increased guidance is a welcomed surprise.
Bottom line, DKS's Q2 report highlights its ability to successfully navigate a lengthy period of high inflation. Its results also speak volumes about the company's brand loyalty and fortified position to capitalize on back-to-school trends and a secular shift toward living a more active lifestyle.
On a side note, DKS's Q2 numbers are encouraging for its competitors Hibbett (HIBB) and Academy Sports + Outdoors (ASO), which report JulQ earnings on August 25 and September 8, respectively.
Zoom Video's growth outlook blurred as enterprise segment tries to offset fading online segment (ZM)
As much as Zoom Video (ZM) would like to distance itself from the individual and small group videoconferencing business that made it a rousing success during the pandemic, the company's weak Q2 report showed that leaving the past behind can be difficult. Categorized as the Online segment by ZM, this once booming business has fallen on hard times as people forgo Zoom meetings to get together in person. After decreasing by about 4% last quarter, revenue for the Online segment fell by 9% yr/yr in Q2.
While detrimental to ZM, this ongoing drop-off on the consumer side is hardly unexpected. In fact, for the past several quarters, ZM has intently focused on diversifying its business by expanding its enterprise customer base. A major aspect of that strategy revolves around adding new capabilities, such as Zoom Phone and Zoom Contact Center. The company has enjoyed some success during this transition, as illustrated by the Enterprise segment becoming a larger portion of total sales. On that note, Enterprise represented 54% of total revenue in Q2, compared to 52% last quarter, and 46% in the year-earlier quarter.
However, the gains on the Enterprise side are not materializing fast enough to offset the losses on the free-falling Online segment. In fact, the Enterprise business is experiencing its own issues as companies rein in spending. Consequently, ZM's Q2 revenue growth slowed to a pedestrian 7.6% -- the slowest rate in the company's history. Worse yet, ZM's downside Q3 guidance indicates a further slowdown to just 4-5% growth, even as the company continues to aggressively invest for growth. This disconcerting dynamic explains why ZM cut its FY23 EPS guidance to $3.66-$3.69 from $3.70-$3.77.
- In Q2, Sales & Marketing expenses jumped by 35% to $286 mln, representing approximately 26.0% of sales, compared to 20.7% in Q2 of last year. Due to ZM's efforts to expand its product portfolio, Research & Development costs surged by 81% yr/yr to $98 mln, accounting for about 8.9% of sales, versus 5.3% in the year-earlier quarter.
- In a market environment in which enhanced profitability and cost-cutting are revered, ZM's plan to ramp up R&D expenses further probably isn't resonating well with investors. Specifically, the company intends to reach its long-term target of R&D comprising 10-12% of revenue.
- If there was more confidence that ZM's investments would pay off and reignite its growth, then investors may give the company the benefit of the doubt. The problem, though, is that Enterprise revenue growth slowed to 27% from 31% last quarter as it added fewer than expected new enterprise customers.
- ZM ended the quarter with 204,100 enterprise customers, up 2.6% from Q1, and up 18% on a yr/yr basis. In Q1, the company generated new enterprise customer growth of 24%.
- During the earnings conference call, CEO Eric Yuan sought to downplay the deceleration in growth, commenting that the headwinds were mainly related to the strengthening dollar, softness in the Online segment, and timing issues related to bookings. While those factors are playing a significant role, CFO Kelly Steckelberg disclosed that ZM lowered its FY23 revenue guidance by $150 mln, with $115 mln of that total related to macroeconomic conditions.
It was undoubtedly a rough quarter, but there were a couple bright spots. Zoom Phone continues to perform well with the number of customers with 10K paid seats or more soaring by 112% yr/yr. Also, non-GAAP gross margin expanded by 270 bps yr/yr to 78.9%, driven by ZM's increasing usage of co-located data centers. Overall, though, the discouraging quarterly report is creating more skepticism and doubt regarding ZM's prospects in a more normalized world.
Palo Alto Networks wraps up FY22 on a strong note; PANW keeps rocking its billings numbers (PANW)
Palo Alto Networks (PANW +10%) is trading higher after wrapping up FY22 on a high note. The cybersecurity giant reported a nice EPS beat in Q4 (Jul) with in-line revenue. We also got our first look at FY23 guidance, which was well ahead of analyst expectations. And if all that were not enough, PANW also announced a 3-for-1 stock split, its first ever since its IPO in July 2012. It also added $915 mln to its share repurchase authorization, increasing it to $1 bln.
Here is what jumped out to us:
- PANW keeps rocking its billings numbers. PANW outdid itself with another huge billings quarter, its third consecutive large beat and back-to-back 40+% growth rates. Q4 billings grew 44% yr/yr to $2.70 bln, well ahead of the $2.32-2.35 bln prior guidance and an acceleration of growth from +32% in Q2 and +40% in Q3. Billings is a key operating metric in terms of evaluating the sales pipeline and clearly the next few quarters look bright.
- Just to provide a little context on that billings number. The fiscal year end is always a seasonally strong quarter for billings, so that helped results. Also, PANW concedes that it had some pull-forwards and it inked more longer-duration deals in Q4. If you normalize for that, PANW says the number would be in the mid-to-high 30s. But that is still impressive growth.
- That PANW keeps posting robust earnings/billings despite a tough macro environment is impressive. Specifically, PANW says it arguably saw the most challenging supply chain conditions over the past year that the technology industry has ever seen. PANW expects conditions will eventually ease, but it is not expecting a material improvement prior to the end of FY23. To provide upside guidance despite this, is a good sign.
- Something else that stood out to us is a topic we do not touch on often. PANW is seeing the return of employees who had left for seemingly greener pastures. Dozens of top performers have been rehired with many more in the funnel. Over 70% of people PANW has reached out to have expressed a desire to come back after leaving for from start-ups and peer companies. We found this notable because it comes on the heels of other companies, like DocuSign (DOCU), which are having trouble retaining employees. We think that is great evidence that PANW's prospects are pointing up. Employees know the company best and we see this as a ground-level vote of confidence.
Overall, this was a great quarter for PANW. The numbers were impressive, but we think the stock split is also a big reason why the stock is sharply higher today. The other big picture takeaway here is that cybersecurity seems to be more durable and resilient than other tech categories. Also, billings has accelerated meaningfully in recent quarters. It is always a great sign to see billings growth exceed revenue growth. That tells us that clients' wallets remain open and they understand the critical importance of protecting its technology assets and network.
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