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To: Return to Sender who wrote (89511)	1/4/2023 11:10:02 PM
From: Sam	2 Recommendations Recommended By Return to Sender Sr K Read Replies (1) \| Respond to of 95432

Hopeful! Battered by Covid, China Hits Pause on Giant Chip Spending Aimed at Rivaling US Beijing plans alternative measures to support local firms US is bolstering campaign to crimp China’s access to key tech By Bloomberg News January 4, 2023 4:22 AM EST China is pausing massive investments aimed at building a chip industry to compete with the US, as a nationwide Covid resurgence strains the world’s No. 2 economy and Beijing’s finances. Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said. While some continue to push for incentives of as much as 1 trillion yuan ($145 billion), other policymakers have lost their taste for an investment-led approach that’s not yielded the results anticipated, the people said. Instead, they’re seeking alternative ways to assist homegrown chipmakers, such as lowering the cost of semiconductor materials, the people said, asking not to be identified revealing sensitive negotiations. That would mark a shift in Beijing’s approach toward an industry regarded as crucial to challenging American dominance and safeguarding Chinese economic and military competitiveness. It underscores how the country’s economic ructions are taxing Beijing’s resources and hobbling its chip ambitions — one of President Xi Jinping’s top priorities. That could have ramifications for spending in other critical areas, from the environment to defense. Shares in Chinese chipmakers and gear suppliers underperformed a broad market rally. Tokyo Electron Ltd. slid 1.2% in Japan, while Chinese peers including Naura Technology Group Co. and Advanced Micro-Fabrication Equipment Inc. fell more than 1%. It’s unclear what other chip policies Beijing is considering, or whether it will ultimately decide to ditch the capital investment-heavy approach that’s worked so well in propelling its manufacturing sector over the past decades. China’s government could still decide to divert resources from other arenas to fund its chipmakers. Representatives for the State Council Information Office and Ministry of Industry and Information Technology didn’t immediately respond to faxed requests for comment. But the discussions now underway are in stark contrast to Beijing’s prior efforts of pouring colossal resources into the chip industry, including setting up the National Integrated Circuit Industry Investment Fund in 2014. That vehicle lies at the heart of Xi’s unhappiness with Beijing’s prior philosophy. Known within the industry as the Big Fund, it drew about $45 billion in capital and backed scores of companies, including China’s chipmaking champions Semiconductor Manufacturing International Corp. and Yangtze Memory Technologies Co. Xi’s administration grew frustrated that tens of billions of dollars funneled into the industry over the past decade haven’t produced breakthroughs that allow China to compete with the US on a more equal footing. In fact, SMIC and Yangtze, arguably the two most advanced Chinese semiconductor players, were crippled by US sanctions. Senior Beijing officials ordered a flurry of anti-graft probes into top industry figures last summer, blaming corruption for wasted and inefficient investment. The Big Fund is likely to lose its stature as a result, the people said. All that happened as semiconductors increasingly became a key battleground in the rivalry between China and the US. Xi has repeatedly talked about the need for a sense of urgency to resolve China’s so-called chokepoints: areas where the country still relies heavily on the US and other foreign powers, including critical technologies such as chips. He has implored top officials to achieve self-sufficiency in key technologies as the US moves to isolate China. When he secured a precedent-breaking third term in October, Xi vowed to “move faster” in implementing strategic projects to increase innovation, saying “efforts will be made to improve the new system for mobilizing resources nationwide to make key technological breakthroughs, and boost China’s strength in strategic science and technology.” In response, Chinese officials recently discussed whether to offer additional incentives for domestic semiconductor companies, the people said. But many reckoned it would be difficult to pool a substantial amount after Beijing had spent heavily to combat Covid over past years, according to the people. Instead, officials are now asking local semiconductor material suppliers to cut prices to provide support to their domestic customers, the people said. Weak tax revenue, declining land sales and the cost of stemming Covid has squeezed the government’s finances, pushing the fiscal deficit to a record last year. Meanwhile, the US is proving increasingly aggressive in going after China’s technological ambitions. Last year, it accelerated a campaign to contain Beijing’s chip endeavors, wielding various tools including export controls to deter China’s progress in emerging technologies. That was part of efforts to maintain what US National Security Advisor Jake Sullivan called “as large of a lead as possible.” Its key allies including the Netherlands and Japan have also agreed in principle to tighten controls over the export of advanced chipmaking machinery to China, Bloomberg News has reported, in what may be another potentially debilitating blow to Beijing’s grand chip plans. — With assistance by Dong Cao, Debby Wu, Yuan Gao, Mayumi Negishi, Daniel Ten Kate, John Liu and Nasreen Seria "

To: Return to Sender who wrote (89511)

1/5/2023 4:33:13 PM

From: Return to Sender

Read Replies (3) | Respond to of 95432

Market Snapshot

briefing.com

Dow	33010.07	-259.63	(-0.78%)
Nasdaq	10352.31	-106.37	(-1.02%)
SP 500	3820.64	-32.33	(-0.84%)
10-yr Note	-3/32	3.72

NYSE	Adv 1232	Dec 1758	Vol 876 mln
Nasdaq	Adv 1807	Dec 2759	Vol 4.7 bln

Industry Watch

Strong: Energy

Weak: Real Estate, Materials, Utilities, Health Care, Financials, Consumer Discretionary

Moving the Market

-- Stronger-than-expected labor data, paired with weak trade data, stoking concerns about the Fed continuing on its rate hike path and the potential for a policy mistake

-- Weakness in the mega cap space; weakness in AMZN after announcing job cuts

-- Treasury yields climbing after this morning's data releases; sharp rise in U.S. Dollar Index

Closing Summary
05-Jan-23 16:25 ET

Dow -339.69 at 32930.01, Nasdaq -153.52 at 10305.16, S&P -44.87 at 3808.10
[BRIEFING.COM] Today's trade was decidedly negative with the market giving up yesterday's gains and then some. The main indices saw some choppy action and remained pinned below their flat lines for the entire session. The S&P 500 closed just above the 3,800 level after hitting a high of 3,873 in yesterday's trade.

This morning's economic releases stoked concerns about the Fed's rate hike path and a potential policy mistake triggering a deeper economic setback, which drove today's broad based retreat.

A stronger-than-expected ADP Employment Change Report for December and initial jobless claims for the week ending December 31, which hit their lowest level since September, indicated that the labor market remains tight. Simultaneously, a sharp narrowing in the November trade deficit that was led by declines in both exports and imports reflected weakening global demand.

Investors are aware that the Fed considers a weakening of the labor market to be an integral step in bringing down inflation, so today's strong labor data left market participants fearful about the Fed continuing to raise rates and not entertaining a pivot to a rate cut cycle anytime soon. Piling onto these concerns, Kansas City Fed President George (not an FOMC voter) told CNBC in an interview this morning that she sees the fed funds rate reaching 5.0% and staying there "well into 2024."

Investors were also cognizant that they will receive more labor data tomorrow in the December Employment Situation Report at 8:30 a.m. ET.

Things improved a bit in the afternoon trade in a move that coincided with St. Louis Fed President Bullard (not an FOMC voter) saying, "While the policy rate is not yet in a zone that may be considered sufficiently restrictive, it is getting closer." The improvement was short lived, though, as sellers renewed their efforts, leaving the indices near their lows for the day at the closing bell.

Another headwind for the equity market today was increased selling pressure in the Treasury market in response to the 8:30 a.m. ET data releases. The 10-yr note hit 3.78% earlier before settling the session at 3.72%. The 2-yr note yield rose eight basis points to 4.45%.

With market participants trading more cautiously, ten of the 11 S&P 500 sectors closed in the red. The real estate (-2.9%) and utilities (-2.2%) were the worst performers while energy (+2.0%) was alone in positive territory. Separately, the mega cap stocks also traded weakly, applying some added pressure on the major indices.

Amazon.com (AMZN 83.12, -2.02, -2.4%) was a notable drag in that respect, weighing on the consumer discretionary sector (-1.0%), after announcing plans to cut ~18,000 positions.

Dow Jones Industrial Average: -0.8% YTD
S&P Midcap 400: flat YTD
S&P 500: -0.8% YTD
Russell 2000: -0.5% YTD
Nasdaq Composite: -1.5% YTD

Reviewing today's economic data:

The ADP Employment Change showed that private employers added 235,000 jobs in December after a 127,000 increase in November.
Initial jobless claims for the week ending December 31 decreased by 19,000 to 204,000 (Briefing.com consensus 225,000). That is the lowest level of initial claims since September. Continuing jobless claims for the week ending December 24 decreased by 24,000 to 1.694 million.
- The key takeaway from the report is that the low level of initial claims -- a leading indicator -- is a telltale sign of a tight labor market that is going to keep the Fed on edge about inflation remaining elevated in spite of some other signs of weakening in the broader economy.
The trade deficit narrowed to $61.5 billion in November (Briefing.com consensus -$76.4 billion) from an upwardly revised $77.8 billion (from -$78.2 billion) in October. That is the smallest trade deficit since September 2020 and it was the result of exports being $5.1 billion les than October exports and imports being $21.5 billion less than October imports.
- The key takeaway from the report is that the weakness in exports and imports speaks to weakening global demand, yet the sharp drop in imports speaks to weakening demand in the U.S. economy following prior inventory building.
The final IHS Markit Services PMI reading for December came in at 44.7 after the prior reading of 44.4.
The weekly EIA Natural Gas Inventories showed a draw of 221 bcf versus a draw of 213 bcf last week. Natural gas futures took a turn lower after the release, down 7.8% to $3.49/mmbtu.
The weekly EIA Crude Oil Inventories showed a build of 1.69 million barrels after last week's build of 0.718 million barrels. WTI crude oil futures are up 1.3% to $73.81/bbl.

Looking ahead to Friday, market participants will have their attention turned to the December Employment Situation Report at 8:30 a.m. ET, which includes Nonfarm Payrolls (Briefing.com consensus 210K; Prior 263K), Nonfarm Private Payrolls (Briefing.com consensus 200K; Prior 221K), Unemployment Rate (Briefing.com consensus 3.7%; Prior 3.7%), Avg. Hourly earnings (Briefing.com consensus 0.4%; Prior 0.6%), and Avg. Workweek (Briefing.com consensus 34.4; Prior 34.4).

Other data out tomorrow includes:

10:00 ET: November Factory Orders (Briefing.com consensus -0.4%; Prior 1.0%)
10:00 ET: December ISM Non-Manufacturing Index (Briefing.com consensus 55.0%; Prior 56.5%)

Major averages lose steam ahead of closing bell
05-Jan-23 15:30 ET

Dow -331.56 at 32938.14, Nasdaq -140.57 at 10318.11, S&P -45.65 at 3807.32
[BRIEFING.COM] The stock market is on a downtrend ahead of the closing bell with the main indices moving toward earlier lows.

Looking ahead to Friday, market participants will have their attention turned to the December Employment Situation Report at 8:30 a.m. ET, which includes Nonfarm Payrolls (Briefing.com consensus 210K; Prior 263K), Nonfarm Private Payrolls (Briefing.com consensus 200K; Prior 221K), Unemployment Rate (Briefing.com consensus 3.7%; Prior 3.7%), Avg. Hourly earnings (Briefing.com consensus 0.4%; Prior 0.6%), and Avg. Workweek (Briefing.com consensus 34.4; Prior 34.4).

Other data out tomorrow includes:

10:00 ET: November Factory Orders (Briefing.com consensus -0.4%; Prior 1.0%)
10:00 ET: December ISM Non-Manufacturing Index (Briefing.com consensus 55.0%; Prior 56.5%)

Market climbs off lows
05-Jan-23 15:00 ET

Dow -259.63 at 33010.07, Nasdaq -106.37 at 10352.31, S&P -32.33 at 3820.64
[BRIEFING.COM] The main indices continue to climb off session lows. With worries about the Fed making a policy mistake at the forefront today, market participants are likely responding favorably to Saint Louis Fed President Bullard (not an FOMC voter) saying earlier that he believes 2023 may be a disinflationary year.

Market internals reflect more mixed action. Decliners still outpace advancers, but the margins have narrowed somewhat to a 4-to-3 lead at both the NYSE and the Nasdaq.

Energy complex futures settled in mixed fashion. WTI crude oil futures rose 1.0% to $73.68/bbl and natural gas futures fell 8.8% to $3.43/mmbtu.

EPAM Systems catches Wolfe Research downgrade, Lamb Weston outperforms on earnings
05-Jan-23 14:30 ET

Dow -280.65 at 32989.05, Nasdaq -107.36 at 10351.32, S&P -32.32 at 3820.65
[BRIEFING.COM] The S&P 500 (-0.84%) is tied for the "best" session in terms of percentages on Thursday, down just 32 points.

S&P 500 constituents EPAM Systems (EPAM 306.99, -28.23, -8.42%), Constellation Brands (STZ 211.59, -19.57, -8.47%), and ServiceNow (NOW 371.20, -22.65, -5.75%) dot the bottom of the standings. EPAM slips to the bottom of the S&P after Wolfe Research downgraded the stock to a Peer Perform, STZ falls following this morning's earnings and commentary about headwinds in the beer business, while NOW caught a target cut out of Piper Sandler this morning.

Meanwhile, Idaho-based packaged foods company Lamb Weston (LW 96.09, +8.61, +9.84%) is today's best performer after this morning's best-and-raise report.

Gold slips, halting recent run to multi-month highs
05-Jan-23 14:00 ET

Dow -278.58 at 32991.12, Nasdaq -101.50 at 10357.18, S&P -30.93 at 3822.04
[BRIEFING.COM] With about two hours to go on the penultimate session of the week the tech-heavy Nasdaq Composite (-0.97%) is at the bottom of the standings.

Gold futures settled $18.40 lower (-1.0%) to $1,840.60/oz, putting a stop to the yellow metal's rally to multi-month highs.

Meanwhile, the U.S. Dollar Index is up about +0.7% to $104.95.

Page One

Last Updated: 05-Jan-23 09:02 ET | Archive
Labor market data leaves Fed (and market) in a pinch
Santa Claus ultimately found his way to Wall Street thanks to a positive showing yesterday that resulted in a net gain of roughly 30 points, or 0.8%, for the seven-day trading stretch that began December 23. The positive disposition for this period has, historically, often been a good sign for the start of the year.

Importantly, it is not a sure-fire sign that the stock market will start the year on a good note, as last year demonstrated to all market watchers, so one can interpret things as they so choose.

We can see this morning that Santa's good cheer is not carrying over in pre-market trading. Currently, the S&P 500 futures are down 21 points and are trading 0.6% below fair value, the Nasdaq 100 futures are down 69 points and are trading 0.6% below fair value, and the Dow Jones Industrial Average futures are down 167 points and are trading 0.5% below fair value.

The backtracking has a lot to do with concerns that the Fed will keep frontrunning the likelihood of more rate hikes because of the enduring strength of the labor market that threatens to keep wage-based inflation pressures on the high side.

We learned in the FOMC Minutes yesterday that Fed officials certainly aren't frontrunning the likelihood of rate cuts in 2023. On the contrary, "no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023."

The labor data this morning won't change that thinking.

The ADP Employment Change Report for December showed private sector employment increased by 235,000 jobs in December (Briefing.com consensus 148,000). That was much stronger than expected and up from 127,000 in November.

Separately, initial jobless claims for the week ending December 31 decreased by 19,000 to 204,000 (Briefing.com consensus 225,000). That is the lowest level of initial claims since September. Continuing jobless claims for the week ending December 24 decreased by 24,000 to 1.694 million.

The key takeaway from the report is that the low level of initial claims -- a leading indicator -- is a telltale sign of a tight labor market that is going to keep the Fed on edge about inflation remaining elevated in spite of some other signs of weakening in the broader economy.

And there were more signs on that front this morning, starting with Amazon.com (AMZN) announcing that it plans to cut approximately 18,000 jobs, Bed Bath & Beyond (BBBY) issuing a going concern warning, and a sharp narrowing in the November trade deficit that was the result of exports and imports (but particularly imports) being less than they were in October.

Specifically, the trade deficit narrowed to $61.5 billion in November (Briefing.com consensus -$76.4 billion) from an upwardly revised $77.8 billion (from -$78.2 billion) in October. That is the smallest trade deficit since September 2020 and it was the result of exports being $5.1 billion less than October exports and imports being $21.5 billion less than October imports.

The key takeaway from the report is that the weakness in exports and imports speaks to weakening global demand, yet the sharp drop in imports speaks to weakening demand in the U.S. economy following prior inventory building.

In brief, this morning's reports were the worst combination as it relates to the market's concerns about monetary policy. Strong labor market data combined with weak trade data will exacerbate concerns about the Fed continuing to raise rates -- and keeping them higher for longer -- potentially making a policy mistake that translates into a hard economic landing.

The 2-yr note yield, at 4.38% in front of the reports, has climbed to 4.46%, up nine basis points for the day. The 10-yr note yield, at 3.69% in front of the report, hit 3.75% before slipping back to 3.73%, up two basis points for the day.

-- Patrick J. O'Hare, Briefing.com

Helen of Troy pulls back after announcing layoffs as economic conditions remain challenging (HELE)

Helen of Troy (HELE -2%), a manufacturer of houseware, home, and beauty products, is pulling back today despite delivering a double-digit earnings beat and a narrower-than-expected sales decline of just 10.6% yr/yr in Q3 (Nov). HELE also raised its FY23 guidance, expecting adjusted EPS of $9.20-9.40, up $0.20 on the low end from prior guidance, and sales of $2.025-2.05 bln, up $0.025 bln from the low end of its previous forecast.

Despite these strong points, HELE's macroeconomic comments sparked some concerns. The company noted that consumption remains soft across some of its categories, and retailers continue to reduce orders as they work through their inventory. Also, adjusted operating margins dipped by 40 bps yr/yr to 16.6%. Meanwhile, in connection with HELE's restructuring plan, dubbed "Project Pegasus," the company plans to lay off approximately 10% of its global workforce as it changes its organizational structure.

Other minor details regarding Project Pegasus involve HELE combining its Beauty and Health & Wellness segments into one reportable segment referred to as Beauty & Wellness. The company is also creating a North America Regional Market Organization responsible for sales in all regional categories and channels. Lastly, HELE is enhancing its focus on certain functions under shared services, particularly in Operations and Finance.

Overall, the restructuring plan is estimated to result in the same benefits HELE outlined last quarter, including $75-85 mln in annualized savings beginning in FY24 (Feb), which should drive adjusted operating margin expansion.

Although these blemishes provide the kindling needed for shares of HELE to erase this week's gains, there were still some highlights from Q3 outside of strong headline numbers worth mentioning.

Although HELE's Health & Wellness segment saw an 11.5% sales decline yr/yr, it still experienced some tailwinds powered by a marked increase in various viruses, leading to a strong sell-through of thermometers, humidifiers, and inhalants. As a result, HELE's major retailer customers quickly saw a reduction in inventory for these products. A similar story materialized internationally as well.
- Furthermore, replenishment orders from retailers have been robust to start Q4 (Feb), leading HELE to forecast strong shipments of its cold and cost-related products.
The Home & Outdoor segment also fell, declining 7.0%, driven by softening consumer demand. However, total POS for the OXO brand remains firmly ahead of pre-pandemic levels, underscoring a sturdier foundation HELE has continued to build off of since the pandemic.
International sales were above expectations, climbing 15.3% yr/yr with notable strength in EMEA and Asia.

Bottom line, HELE's results did not pop, and commentary remains somewhat cautious. As many of HELE's products are discretionary, the near term remains hazy as inflationary pressures could continue dampening consumer sentiment. However, HELE's restructuring plan is progressing nicely, allowing the company to return to margin growth and rebuild market share for its most promising brands.

Conagra (CAG) as Investment Idea for 2023; food stocks look like a good hedge

With the new year upon us, we have started posting profiles we call Investment Ideas for 2023. These are longer term buy-and-hold ideas that we post around this time every year. See 2022 Recap. Importantly, we recommend using a 20-25% stop loss limit. Today we wanted to profile Conagra (CAG) following its impressive earnings report this morning. Also, see our other recent profile: Carter's (CRI).

Conagra caught our attention because it is the latest food company to report an impressive earnings beat as it seems price increases are finally catching up to cover higher input costs. SJM and CPB also recently reported big upside quarters. Conagra, whose brands include Birds Eye, Marie Callender's, Banquet, Healthy Choice, Slim Jim, Reddi-wip and Vlasic, posted its largest EPS beat of any quarter over the past five years. CAG's beats are usually pretty modest, so the Q2 (Nov) upside was surprising and made us double check.

Coming into this report, Conagra prepared investors that inflation-driven price increases that went into effect starting in early Q2 were likely to cause volume to decline. That did happen, but the company seems to have managed it well. Additional price increases are slated for Q3 (Feb), but the magnitude will be smaller and more targeted than previous price increases.
Specifically, the 8.6% increase in organic sales growth was driven by a 17% improvement in price/mix, which was partially offset by an 8.4% decrease in volume. Price/mix was boosted by the recent price increases. Volume declined, but it was less than the company had expected.
All of this led to better margins as higher sales and productivity more than offset the negative impacts of cost of goods sold inflation and continued elevated supply chain operating costs. Specifically, adjusted gross margin in Q2 increased 310 bps yr/yr to 28.2% while adjusted operating margin increased 237 bps to 17.0%. That is a big jump, especially since it follows 54 bps yr/yr GM decline in Q1.
There was also good news on the market share front as the company gained share in snacking categories including meat snacks and microwave popcorn, and staples categories including refried beans and canned meat.
By segment, the standout performer was Grocery & Snacks, which saw revenue jump 10.5% yr/yr to $1.2 bln. However, the Refrigerated & Frozen segment was not far behind with sales up 9.6% yr/yr to $1.2 bln. Sales from the Foodservice segment also bounced back nicely, up 14.6% to $275 mln. However, as you can see, this is a fairly small segment for Conagra.

Overall, food stocks may not be as exciting as high-growth companies or companies with cutting-edge technology, but they look pretty good as a hedge against a tough economy and the weakness we expect in tech stocks as 2023 gets underway. Job cuts announced just this week from CRM, PEGA, AMZN are a reminder that this could be a rough earnings season for tech names as many seem to have hired too many people during the pandemic.

As such, when deciding which names to profile as Investment Ideas, we have been keeping an eye out for industries that are more recession-proof and food is a good one. But it's not only that. The pandemic has also created some new habits for consumers that look to be pretty durable even as the pandemic eases. Namely, people are eating at home more and that is good for companies like Conagra. We also like its margin expansion, its attractive 3.3% dividend yield and the stock chart looks good. After a multi-month trading range in the $30-36 area, the stock has recently broken above that range, which is a pattern we like to see.

Walgreens Boots Alliance's positives from Q1 overshadowed by a few areas of concern (WBA)

Shares of Walgreens Boots Alliance (WBA -7%) are not reflecting otherwise healthy headline results from Q1 (Nov), including top and bottom line upside, as well as a reiterated FY23 (Aug) EPS forecast and raised FY23 sales projections. WBA also reaffirmed its long-term adjusted EPS target of low teen growth.

So why are investors underwhelmed today?

WBA upping its FY23 sales forecast was likely already anticipated, given it just raised its FY25 revenue guidance to $14.5-16.0 bln from $11.0-12.0 bln after agreeing to pay $8.9 bln for Summit Health-CityMD in November.
- Likewise, WBA's detailed its expectations to achieve positive adjusted EBITDA in its newly formed U.S. Healthcare segment by the end of FY23 in November, a sizeable swing from its projection of a $220-240 mln loss last quarter.
Meanwhile, an unadjusted net loss of $3.7 bln, considerably down from an unadjusted net gain of $3.6 bln in the year-ago quarter, is weighing on shares today. The colossal decline reflects a $6.5 bln pre-tax charge for opioid-related litigation.
WBA's AllianceRx business also remains a drag on top-line results, clipping 485 bps off of Q1 growth, causing overall sales to fall 1.5% yr/yr to $33.38 bln, although this was still ahead of analyst expectations.
There could also be a general uneasiness surrounding WBA's ambitious investments over the past year. On top of the recent $8.9 bln Summit Health purchase, WBA has poured $5.2 bln into VillageMD, $2.0 bln into buying Shields, and $700 mln into acquiring CareCentrix. With so much capital used to bolster WBA's footprint, it was discouraging to see consolidated pro forma growth of just 38.4% in Q1, falling short of the company's FY23 goal of +45-55%.
- Still, WBA continues to expect FY23 sales of $6.5-7.3 bln in its U.S. Healthcare segment, which includes these investments, consistent with its projection in November.

Many of WBA's other developments in Q1 were also promising. The firm's adjusted EPS of $1.16 edged out analyst estimates despite lapping challenging comparisons from last year when WBA was seeing strong COVID-19 vaccination and testing tailwinds. Comps were up +3.8% in the U.S. on top of robust comps of +7.9% in the year-ago period. WBA's International segment maintained healthy momentum from previous quarters, delivering 4.6% sales growth yr/yr on a constant currency basis, close to its FY23 target of +5-7%.

Nevertheless, investors are looking past these positive developments. And although early results from WBA's investments display some healthy signs, investors remain nervous about what the near term will bring, especially with Q1 growth already falling slightly short of WBA's FY23 projection.

Ulta Beauty as 2023 Investment Idea; operating in a defensive mid-range cosmetic industry (ULTA)

As the largest beauty retailer in the United States, Ulta Beauty (ULTA) is a company we want to highlight as an Investment Idea for 2023. Although shares already ran roughly 12% higher in 2022, with most of the gains coming during the last two months, we see plenty of upside potential for ULTA. The company has shown its resilience during the past year, which carried a series of challenges, including inflationary pressures, labor shortages, and supply chain disruptions.

ULTA made it clear over the past year that the cosmetic industry is well-shielded from the severe drop-off in discretionary spending fueled by decades-high inflation. ULTA put up solid numbers, growing revs double digits in the past four quarters despite lapping unfavorable comparisons from 2021.
- Although there are exceptions to the beauty industry's defensive characteristics, like Coty (COTY) and Estee Lauder (EL), these cosmetic manufacturers encountered company-specific issues, such as supply chain woes and high exposure to China, where lockdowns have hampered the beauty industry.
Although physical locations are a vital part of ULTA's ecosystem, its digital offerings are a crucial component to stay competitive against more prominent players in this space, such as Amazon (AMZN) and Walmart (WMT), as well as drugstores like CVS Health (CVS) and Walgreens Boots Alliance (WBA). Therefore, ULTA's digital tools, such as its Skin Advisor and hairstyle tool, are beneficial in keeping users flocking to its site over these rivals.
Furthermore, ULTA's partnership with Target (TGT), where many Target locations house a "mini" Ulta within the store, bolsters UTLA's physical presence. TGT also noted in OctQ that ULTA nearly tripled its total sales volume yr/yr. Also, ULTA remarked that it is seeing members bounce back to its locations after becoming a member at an Ulta Beauty at Target shop. Cosmetics are unique because consumers want to try out different makeup, fragrance, and skincare products before buying, giving ULTA a crucial differentiating factor.
- On that note, competing physical beauty retailer Sephora may seem poised to steal market share away from ULTA. Parent company LVMH (LVMUY) touched on the excellent performance of Sephora over the past three quarters. Sephora even has its own partnership with Kohl's (KSS), where a slice of many locations house a section dedicated to Sephora.
- However, ULTA and Sephora cater to different clientele, with prices at Sephora, in many cases, being twice as high as competing brands at ULTA. As such, we believe these two companies can enjoy success separately without materially infringing upon each other's market share.
ULTA also boasts a popular loyalty program, possessing 39 mln members as of Q3 (Oct), a 9% bump yr/yr. ULTA tends to see higher overall spending, visitation frequency, and average ticket with its membership base, making its loyalty program a strategic asset and a fundamental component of its long-term growth.

Overall, despite an already-impressive run over the past couple of months, we view 2023 as another favorable year for ULTA. Inflationary pressures on wage rates and consumer products remain a primary concern. However, ULTA has proved its ability to circumvent this headwind, with sales increases outpacing inflationary costs pressure. Lastly, ULTA expects growth to continue in 2023, even if at lower rates, underscoring strong consumer engagement within the beauty category, and anticipates delivering comps within its longer-term range of +3-5%.

Salesforce latest tech name to announce layoffs; could be a tough earnings season for tech (CRM)

Salesforce (CRM +3%) is trading higher today as investors are taking the news of a workforce reduction as a positive although it was more than just that. CRM announced a restructuring plan that includes a 10% workforce reduction (mostly over the coming weeks), select real estate exits and office space reductions within certain markets. CRM expects it will incur $1.4-2.1 bln in charges, of which $0.8-1.0 bln will be incurred in Q4 (Jan).

The company included its letter to employees in a 6-K filing. In that, CRM concedes that the environment remains challenging and customers are taking a more measured approach to their purchasing decisions. It also concedes that as revenue accelerated through the pandemic, it hired too many people.
There has been a lot of change at Salesforce recently. Just last month, co-CEO Bret Taylor suddenly announced he would step down on January 31 to return to his entrepreneurial roots. Marc Benioff will be Chair and CEO. We have to wonder if this decision/outlook played any role in Taylor's decision to step aside.
We got a hint of possible troubles ahead on the earnings call last month. CRM had noted that it was seeing more measured customer buying behavior beginning in July, which led to elongated sales cycles, additional deal approval layers and deal compression particularly in enterprise. As Q3 (Oct) progressed, CRM saw an even more challenging buying environment, driving intense customer scrutiny on every investment dollar, especially in the US and major European markets.

From a bigger picture perspective, this adds to our concerns about the tech space generally as we approach earnings season. We think a lot of tech companies probably hired too many people during the pandemic boom, just like CRM did. A number of companies have already announced layoffs in recent months including META, but we expect to see additional layoffs announced in the coming weeks. Layoffs are likely to be accompanied by cautious guidance as we get our first look at 2023. Of note, PEGA also announced a 4% workforce reduction last night.

Recall that many tech names did not report great Q3 results and offered cautious guidance for Q4. In particular, we saw weak results/comments from cloud-related companies, most notably from Amazon's AWS and Microsoft's Azure, among others. And there likely will be more weakness. For example, in its downgrade of Microsoft (MSFT) today, UBS cited risks that Azure growth will decelerate more than estimates. Overall, we think investors should brace for a tough tech earnings season.