Market Snapshot
briefing.com
| Dow | 32379.72 | -180.79 | (-0.56%) | | Nasdaq | 11832.47 | -27.63 | (-0.23%) | | SP 500 | 3989.18 | -14.96 | (-0.37%) | | 10-yr Note | +31/32 | 3.50 |
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| | NYSE | Adv 711 | Dec 2134 | Vol 1.0 bln | | Nasdaq | Adv 1235 | Dec 3187 | Vol 4.9 bln |
Industry Watch
| Strong: -- |
| | Weak: Real Estate, Communication Services, Utilities, Financials |
Moving the Market
-- Digesting the FOMC policy decision and reacting to Fed Chair Powell's press conference
-- Treasury yields moving lower in response to FOMC decision
-- Bank stocks under pressure again
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Closing Summary
22-Mar-23 16:35 ET
Dow -530.49 at 32030.02, Nasdaq -190.15 at 11669.95, S&P -65.90 at 3938.24
[BRIEFING.COM] The majority of today's session was marked by lackluster action as investors awaited the FOMC policy decision at 2:00 p.m. ET followed by Fed Chair Powell's press conference at 2:30 p.m. ET. The main indices spent the morning oscillating near their flat lines, sporting only modest gains or losses, but ultimately closed the session sharply lower.
Briefly, the FOMC voted unanimously to raise the target range for the fed funds rate by 25 basis points to 4.75-5.00%. In turn, the language of the directive and the Summary of Economic Projections, which showed the Fed's median terminal rate of 5.10% unchanged from December, made it appear as if the Fed is going to entertain the idea of pausing its rate hikes soon.
That view prompted a knee-jerk, positive reaction in the stock market following the release of the directive; however, the positive price action shifted abruptly as Fed Chair Powell was speaking. Bids disappeared and stock prices fell prone to broad based selling interest that accelerated in the last hour of the session.
That retreat was hastened by Fed Chair Powell's acknowledgment that Fed participants do not see rate cuts this year. Separately, he also acknowledged his belief that the events in the banking system do not help the possibility of a soft landing for the economy.
All together, Mr. Powell did not sound especially hawkish nor dovish in his commentary. Importantly though, he did not sound particularly confident in the outlook either and we suspect that lack of confidence played a part as well in undermining investor confidence that led to the selling during his presentation.
Bank stocks found themselves under renewed selling pressure, with losses compounding during and after the press conference. The SPDR S&P Bank ETF (KBE) fell 5.2% and the SPDR Regional Bank ETF (KRE) fell 5.7%. To be fair, losses compounded for most stocks.
The S&P 500 retraced all of yesterday's gains and closed just above its 200-day moving average (3,934).
All 11 S&P 500 sectors closed with sizable losses ranging from 0.9% (information technology) to 3.6% (real estate). Another notable laggard was the financial sector, down 2.4%.
Treasuries settled the session with gains across the curve. The 2-yr note yield fell 20 basis points and the 10-yr note yield fell 11 basis points to 3.50%. The U.S. Dollar Index fell 0.9% to 102.38.
- Nasdaq Composite: +11.5% YTD
- S&P 500: +2.5% YTD
- S&P Midcap 400: -1.4% YTD
- Russell 2000: -1.9% YTD
- Dow Jones Industrial Average: -3.4% YTD
Reviewing today's economic data:
- Weekly MBA Mortgage Application Index rose 3.0% with refinancing applications increasing 5.0% and purchase applications rising 2.0%
- Weekly EIA Crude Oil Inventories showed a draw of 1.06 million barrels following a build of 1.55 million
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 204,000; prior 192,000), Continuing Claims (prior 1.684 mln), and Q4 Current Account balance (prior -$217.10 bln)
- 10:00 ET: February New Home Sales (Briefing.com consensus 650,000; prior 670,000)
- 10:30 ET: Weekly natural gas inventories (prior -58 bcf)
Market recovers somewhat
22-Mar-23 15:30 ET
Dow -143.87 at 32416.64, Nasdaq +3.79 at 11863.89, S&P -10.67 at 3993.47
[BRIEFING.COM] The market has recovered from its lows of the day and the main indices all moved back toward their flat lines.
Treasuries settled the session with gains across the curve in response to the FOMC policy decision and Fed Chair Powell's subsequent comments.
Looking ahead to Thursday, market participants will receive the following economic data:
- 8:30 ET: Weekly Initial Claims (Briefing.com consensus 204,000; prior 192,000), Continuing Claims (prior 1.684 mln), and Q4 Current Account balance (prior -$217.10 bln)
- 10:00 ET: February New Home Sales (Briefing.com consensus 650,000; prior 670,000)
- 10:30 ET: Weekly natural gas inventories (prior -58 bcf)
Volatility continues as Fed Chair Powell speaks
22-Mar-23 15:05 ET
Dow -180.79 at 32379.72, Nasdaq -27.63 at 11832.47, S&P -14.96 at 3989.18
[BRIEFING.COM] As Fed Chair Powell continues the Q&A portion of his press conference, the market continues to exhibit notable turbulence. Currently, the main indices are near their worst levels of the session.
Some key remarks from the press conference so far include the acknowledgement that "It's too soon to determine the extent of the events in the banking system and too soon to tell how monetary policy should respond." Along with Mr. Powell reiterating that FOMC participants don't see rate cuts this year. They just don't.
Separately, energy complex futures settled in mixed fashion. WTI crude oil futures rose 1.9% to $70.79/bbl and natural gas futures fell 4.7% to $2.34/mmbtu.
Fed hikes rates 25 bps, projections show one more expected this year
22-Mar-23 14:25 ET
Dow +44.09 at 32604.60, Nasdaq +73.02 at 11933.12, S&P +7.92 at 4012.06
[BRIEFING.COM] Stocks jabbed higher while bond yields fell after the Fed unanimously decided to raise the target range for the federal funds rate by 25 basis points to 4-3/4 to 5 percent while adding that some additional policy firming may be appropriate. Currently, the S&P 500 (+0.20%) has leveled off the initial Fed-fueled spike, now near mid-morning highs.
In regards to recent banking volatility the Fed commented that, in its view, the U.S. banking system is sound and resilient. The Fed said that recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation.
In addition, the Committee said it would continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.
On the whole the Fed said that recent indicators pointed to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low, while inflation remains elevated.
Projections for the median Fed funds rate stayed unchanged vs. the December projections at 5.1%. Thus, forecasts for this year imply one more 25 bps rate hike, while a likely 75 bps in cuts are forecasted for next year. Further, projections for 2023 and 2024 GDP growth came down vs. the December projections, while projections for inflation for this year were up modestly vs. December projections.
Gold settles higher ahead of Fed decision
22-Mar-23 13:55 ET
Dow -72.27 at 32488.24, Nasdaq +13.46 at 11873.56, S&P -2.71 at 4001.43
[BRIEFING.COM] The tech-heavy Nasdaq Composite (+0.11%) has inched its way back into positive territory in the last half hour.
Gold futures settled $8.50 higher (+0.4%) to $1,949.60/oz, clawing back a portion of yesterday's retreat.
Meanwhile, the U.S. Dollar Index is down about -0.2% to $103.09.
As a reminder, the FOMC will announce its rate decision at the top of the hour.
FOMC decision is the key matter of the day
If there is a "fear of the Fed," the stock market isn't showing it so far this week. The market-cap weighted S&P 500 is up 2.2% while the Invesco S&P 500 Equal Weight ETF (RSP) is up 2.1%. The latter is the more comforting indication since all stocks are weighted equally, meaning there isn't any one stock -- or group of stocks -- that can skew the performance disproportionately up or down.
The early gains this week have been helped along by a calming down in the bank stocks, which really means that they have been rebounding nicely following some massive losses. The SPDR S&P Bank ETF (KBE) is up 6.2% and the SPDR S&P Regional Banking ETF (KRE) is up 6.1%.
In turn, we have seen the Treasury market lose some of its nervous-minded edge. The 2-yr note yield is up 40 basis points this week to 4.22% and the 10-yr note yield is up 25 basis points to 3.64%.
Ironically, rising market rates are looked at as a comforting factor at this point since they were viewed as a scare factor about the banking crisis when they were screaming lower.
Another closely-watched component up noticeably is the market's expectations for a rate hike today. According to the CME FedWatch Tool, there is an 86.4% probability of a 25 basis points rate hike, up from 54.6% a week ago.
There isn't a fear of that rate hike, however, because market participants also think it will be one of the last ones in the Fed's tightening cycle before giving way to at least two rate cuts in the second half of the year.
Hence, some have been prone to suggest a rate hike today can be labeled a "dovish hike," thinking that the Fed -- should it in fact raise rates today -- will convey a desire to pause its rate hikes to allow time to assess the impact of the banking issues.
Notwithstanding what the fed funds futures market is indicating, there is still a strong undercurrent of thought in the market that the Fed should hold rates steady today, so it is reasonable to expect some knee-jerk volatility when the policy rate decision and updated Summary of Economic Projections are released at 2:00 p.m. ET.
The more pertinent driver of the market after the policy decision, however, is apt to stem from what is heard during Fed Chair Powell's press conference, which begins at 2:30 p.m. ET. This should be a live-fire press conference in the Q&A period as journalists seek to find out why the Fed missed the SVB Financial blowup in particular and to what degree the Fed thinks this is now a problem for the economy.
Our expectation is that Fed Chair Powell will be very non-committal about the path ahead, emphasizing that there is an unusually wide range of outcomes to take into account, but that the Fed nonetheless believes it has the tools to provide the liquidity needed to keep credit flowing in the banking system and the resolve to ensure inflation is brought back down to its 2.0% target.
Whether he expresses any contrition for leading the market to think a 50 basis points rate hike might be in order at the March meeting less than 72 hours before SVB Financial was take over by regulators remains to be seen.
This meeting isn't all that matters today but there is no question, as the market digests Dow component Nike's (NKE) fiscal Q3 results, some hotter-than-expected inflation data out of the UK, and a surprise profit reported by GameStop (GME), that the FOMC decision is certainly the most important matter today.
Recognizing that, there has been little conviction in the equity futures market. Currently, the S&P 500 futures are down two points and are trading in-line with fair value, the Nasdaq 100 futures are down 15 points and are trading slightly below fair value, and the Dow Jones Industrial Average futures are up seven points and are trading in-line with fair value.
-- Patrick J. O'Hare, Briefing.com
Petco Health and Wellness hits record lows on weak FY24 (Jan) revenue guidance (WOOF)
Petco Health and Wellness (WOOF -12%) is hitting all-time lows today after missing Q4 (Jan) earnings estimates and guiding FY24 revs meaningfully below consensus. The pet supplies and services retailer has not enjoyed much stock appreciation since going public in January 2021 at $18 per share. After initially soaring at open, the stock has remained on the decline, tumbling nearly 70% since.
Although WOOF initially benefited from a spike in pet adoption, spurred primarily following the pandemic, as pet owners splurged on higher-margin discretionary items, consumers quickly shifted toward lower-margin consumables as pet adoption died down. The mix shift toward food was fully displayed in 3Q22 (October 2021), when WOOF's gross margins tumbled by around 200 bps yr/yr to 41%. WOOF's shares pulled back sharply following this earnings report and have yet to return to levels seen immediately prior.
- Unfortunately for WOOF, this dynamic remained in play during Q4, as gross margins contracted by 220 bps yr/yr to 39.8%, fueling WOOF's 17.9% dip in adjusted EPS to $0.23. Still, WOOF's earnings were within its projected range of $0.23-0.28. Also, sales growth of 4.2% yr/yr to $1.58 bln, a minor acceleration from the +4.0% posted in Q3 (Oct), topped analyst expectations.
- The slightly accelerated growth in Q4 was due to healthy progress on one of WOOF's core growth pillars: rapidly scaling its services. WOOF's Services business, which includes grooming and veterinary services, delivered robust +14% comp growth, a +36% jump on a two-year basis. By adding over 1,100 veterinarians to its ecosystem over the past year, a 40% jump from 2021, WOOF is one of the largest vet providers in the U.S., seeing nearly 1.9 mln pets in 2022.
- WOOF also benefited from its focus on differentiating its product assortment, carrying products typically unavailable at other big-box retailers or on popular online channels. As a result, its consumables sales climbed by 12% yr/yr, driven largely by WOOF's private label WholeHearted banner.
- However, as tends to occur during economic lulls, discretionary sales lagged in Q4, declining by 9% yr/yr. CEO Ronald Coughlin noted that historically, during recessions, discretionary spending is impacted for around five-to-six quarters. The challenges cropped up last year, meaning this category should begin seeing signs of recovery sometime in the back half of FY24.
- Speaking of FY24, WOOF's outlook was not particularly uplifting, expecting adjusted earnings to contract to $0.40-0.48 from $0.75 registered in FY23. Meanwhile, WOOF's revenue forecast of $6.15-6.28 bln represented just 3% growth yr/yr at the midpoint, resembling the company's pandemic year, when sales climbed only 1%.
With WOOF deriving around 40% of its sales from discretionary items, the near term will likely remain challenging. On that note, given rival Chewy's (CHWY) roughly 31% exposure to discretionary items, its JanQ report, scheduled for today after the close, could be better than the market currently fears.
Nike runs past earnings and sales estimates again, but high inventory levels remain a drag (NKE)
Strong results were expected for NIKE (NKE) when the company reported 3Q23 results last night and the athletic footwear and apparel company delivered, easily running past analysts' EPS and revenue estimates. Impressive earnings reports from some of NKE's main partners, including Dick's Sporting Goods (DKS) and Foot Locker (FL), indicated that demand for its products remained quite healthy and that NKE experienced a successful holiday shopping season. However, a positive reaction in the stock wasn't a slam dunk because NKE warned that FY23 gross margin may come in at the lower end of its guidance of a 200-250 bps decline as the company contends with lingering inventory issues.
- In Q3, NKE's gross margin decreased by 330 bps to 43.3%, worse than the 200-250 bps decline that NKE had forecasted, due to higher markdowns to liquidate inventory, negative FX impacts, and higher freight costs. Even as NKE ramped up its discounts, inventory increased by 16% yr/yr to $8.9 bln, setting the stage for higher promotional activity in Q4.
The inventory situation may not be as bad as it seems, though.
- As CFO Matthew Friend pointed out, inventory dollars and units were both down on qtr/qtr basis. More specifically, inventory dollars were down by about $400 mln, or, 4.3% compared to Q2. Furthermore, Mr. Friend stated that NKE intends to liquidate more units by fiscal year end than the company had previously anticipated, thanks to its brand momentum.
That brand momentum is especially evident in NKE's North America market where revenue grew by 27% yr/yr. Like last quarter, the wholesale channel was a source of strength with revenue jumping by 18% on a constant currency basis. It's worth noting, though, that NKE expects wholesale revenue growth to moderate over the next few quarters as it continues to work through inventory.
- Growth was also healthy with sales growing by double-digits in EMEA and APLA, but Greater China was another source of disappointment.
- After increasing by 6% on a constant currency basis last quarter, revenue for Greater China only increased by 1% in Q3, missing analysts' expectations.
- In December, COVID-related policies, including widespread door closures, still disrupted NKE's business. Starting in January, conditions started to improve and NKE saw a rebound at its brick-and-mortar stores. Then, momentum accelerated around the Chinese New Year and continued into February. Therefore, we expect to see a rebound in the Greater China market next quarter.
Although NKE bumped its FY23 revenue growth guidance higher to high-single-digit growth from mid-single-digit growth on a reported basis, this was entirely due to its upside performance in Q3.
- For Q4, the company's revenue guidance is a bit light, calling for flat-to-low single-digit growth, compared to analysts' forecasts for growth of 2.6%. This outlook, along with NKE's somewhat cautious commentary, is what's really weighing on the stock today.
- During the earnings call, NKE stated that its closely monitoring the building pressure on consumer confidence and that its taking a cautious approach with planning its business.
Overall, it was another solid performance for NKE in our view. The stock was strong heading into the report, rallying by more than 5% over the past week, so there's likely a bit of a "sell the news" reaction taking hold today.
Ollie’s Bargain Outlet is up big today after finally reporting upside following several misses
Ollie's Bargain Outlet's (OLLI +10%) is rallying today following an impressive Q4 (Jan) earnings report this morning. This was an important report for this extreme value retailer because Q4 is OLLI's largest revenue quarter each year. While the EPS upside was solid, it did not blow us away. However, after three consecutive EPS misses, we think investors are thrilled with any EPS beat at this point.
- Revenue had decent upside as well. Notably, this was OLLI's first revenue upside quarter after six misses. So again, we think investors are thrilled to see any upside.
- The guidance was a bit tricky. While it was great to see OLLI provide upside guidance for the full year for both adjusted EPS ($2.49-2.58) and revs ($2.036-2.058 bln with comps of +1-2%), the retailer chose not to provide specific Q1 (Apr) guidance. OLLI's normal practice has been to guide for both the full year and the next quarter. Hopefully, this is not a permanent change, but it could be a new policy with the new fiscal year kicking off. It is possible that given its recent misses, OLLI may think it is wiser to not try to forecast on a quarter-by-quarter basis.
- Circling back to the Q4 results, same store comps came in at +3.0%, above prior guidance of +0-2%. Its strongest categories were food, candy, health and beauty, seasonal and automotive but there was softness in discretionary categories such as toys and bed & bath.
- While we are not getting specific comp guidance, OLLI did provide some color on the call. It said it's currently seeing positive momentum and expects Q1 comps at the high end annual guidance of +1-2%. Then for Q2, OLLI expects comps at the midpoint of annual guidance. For Q3, OLLI sees comps being flat to last year due to a strategic change in flyer timing between Q3 and Q4. Then, for Q4, it sees comps being slightly above the high end of its annual guidance range.
- Gross margin improved to 37.6% from 36.5% a year ago. However, that was a bit light of prior guidance at 38.2-38.4% and down from 39.4% in Q3 (Oct). OLLI described Q4 as a highly promotional environment. Adjusted operating margin increased 70 bps yr/yr to 12.1%. Finally, on margins, we think investors are reacting positively to OLLI's FY23 gross margin guidance of 39.1-39.3%, which is well above 35.9% in FY22 and even better than the 38.9% reported in FY21.
- Of note, OLLI says the closeout market remains extremely strong. The disruptions in the market have led to one of the most robust, closeout environments OLLI has seen in a long time. OLLI says its vendor relationships makes it the preferred first call for the best deals on some of the best brands in the market. New vendors are also reaching out. OLLI is focused on adding more newness and sizzle to its product offering.
Overall, we think investors are thrilled to see OLLI get back to reporting upside after a long period of misses. Comps were also solid after a miss in Q3 and the gross margin expansion guidance was encouraging especially in this retail environment. OLLI's decision to stop providing quarterly guidance was a letdown for us but hopefully that will resume in the future. We had concerns going into this report, but hopefully this signals a return to upside quarters again.
Winnebago jumps on better-than-feared FebQ results buoyed by its Marine segment (WGO)
Winnebago (WGO +4%) is towing its shares toward higher ground today following the RV maker's largest Q2 (Feb) earnings beat in two years. Also, despite Q2 being a typical lull period, WGO still managed to crush analysts' sales forecasts in the quarter. We noted yesterday that the bar was lowered after rival Thor Industries (THO) missed top and bottom line estimates in JanQ and trimmed its FY23 (Jul) outlook earlier this month. Since THO's JanQ report caused the market to price in a similarly rough quarter for WGO, sending its shares roughly 5% lower, it only needed to deliver slightly better results.
- WGO did not disappoint. Its bottom line contracted by 40% yr/yr to $1.88 per share, well ahead of consensus. Although the decline appears significant, WGO was lapping challenging comparisons from the year-ago period, when current macroeconomic headwinds had yet to fully materialize. This is why sales also declined yr/yr, dropping 26% to $866.7 mln as WGO was up against +39% growth from 2Q22. Nonetheless, the decline was much better than analysts expected.
- Part of WGO's ability to exceed expectations in Q2 was its more-diversified portfolio compared to THO, namely, WGO's Marine segment, which climbed 16.1% yr/yr in the quarter. Although the growth was due to carryover price increases, it still underscored demand for other outdoor recreation. We mentioned recently that after supplier LCI Industries' (LCII) Marine sales jumped 4% yr/yr in DecQ, outshining its core RV business, WGO's Marine business, which comprised 9% of FY22 revs, could help offset its struggling RV sales.
- WGO has also been keeping cost management at the center of its operations due to heightened economic uncertainty. Although margins still fell across each of WGO's segments, management noted that they remained competitive. Also, outside of WGO's largest segment, Towables, where adjusted EBITDA margins contracted by 410 bps yr/yr, its Motorhome and Marine segments saw margins slip by just 50 bps.
- Although WGO's Q2 numbers were encouraging, economic conditions remain unfavorable. CEO Michael Happe acknowledged that the current environment remains fluid. However, Mr. Happe was optimistic that the company's continued focus on profitability and inventory management, i.e., not overproducing, would keep it well-positioned for long-term success.
- On that note, WGO reiterated its Investor Day FY25 targets, including $5.5 bln in revs, 13% adjusted EBITDA margins, and $400 mln in free cash flow.
While THO's JanQ results illuminated worsening conditions since its previous quarter, WGO's Q2 report was much less concerning. That is not to say WGO is staring at sunny skies ahead. The landscape remains challenging, especially if interest rates continue to rise and inflation remains sticky, which ups the cost of ownership on already-pricey RVs. However, with WGO maintaining its current RV market share over the past two years, and capturing additional share in Marine, while staying focused on costs and inventories, the company should be well positioned for growth once the economy improves.
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