Market Snapshot
| Dow | 40563.06 | +554.67 | (1.39%) | | Nasdaq | 17594.49 | +401.89 | (2.34%) | | SP 500 | 5543.22 | +88.01 | (1.61%) | | 10-yr Note | -29/32 | 3.93 |
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| | NYSE | Adv 2115 | Dec 685 | Vol 888 mln | | Nasdaq | Adv 3050 | Dec 1150 | Vol 5.5 bln |
Industry Watch
| Strong: Consumer Discretionary, Materials, Industrials, Consumer Staples, Financials, Information Technology |
| | Weak: Utilities, Real Estate |
Moving the Market
-- Feeling better about growth prospects and consumer spending after Walmart (WMT) earnings and Retail Sales for July
-- Weekly jobless claims helped calm worries about weakening labor market
-- Treasury yields sharply higher in response
| Closing Summary
15-Aug-24 16:30 ET
Dow +554.67 at 40563.06, Nasdaq +401.89 at 17594.49, S&P +88.01 at 5543.22
[BRIEFING.COM] The stock market registered solid gains in a broad advance. The Dow Jones Industrial Average rose 1.4%, the S&P 500 settled 1.6% higher, the Nasdaq Composite registered a 2.3% gain, and the Russell 2000 climbed 2.4%.
The volatile action exhibited thus far in August was precipitated by a July jobs report that stirred concerns about a weakening economic environment and labor market. So, today's release of economic data that had the market feeling good about the economic environment and labor market invited strong buying activity.
Market participants were reacting to a much better than expected Retail Sales Report for July, which bodes well for consumer spending and earnings prospects, and a pleasing weekly jobless claims report, which calmed fears about a weakening labor market.
Solid earnings results and commentary about the consumer from Walmart (WMT 73.18, +4.52, +6.6%), along with Cisco's (CSCO 48.53, +3.09, +6.8%) solid fiscal Q4 operating performance, contributed to the upside bias.
Just about everything participated in upside moves. Nine of the 11 S&P 500 sectors registered gains led by consumer discretionary (+3.4%) and information technology (+2.5%). The consumer discretionary sector also benefitting from a huge gain in Ulta Beauty (ULTA 365.80, +36.75, +11.2%) after Berkshire Hathaway reported a new position in the stock.
The only sectors that closed lower were the rate-sensitive real estate (-0.3%) and utilities (-0.02%) sectors amid rising market rates.
The 10-yr note yield jumped 11 basis points to 3.93% and the 2-yr note yield settled 15 basis points higher at 4.10% in a reflection of easing concerns about the economic outlook.
- Nasdaq Composite:+17.2% YTD
- S&P 500: +16.2% YTD
- S&P Midcap 400: +8.2% YTD
- Dow Jones Industrial Average: +7.6% YTD
- Russell 2000: +5.4% YTD
Reviewing today's economic data:
- August Philadelphia Fed Index -7.0; Prior 13.9
- July Retail Sales 1.0% (Briefing.com consensus 0.3%); Prior was revised to -0.2% from 0.0%, July Retail Sales Ex-Auto 0.4% (Briefing.com consensus 0.2%); Prior was revised to 0.5% from 0.4%
- The key takeaway from the report is that the increase in retail sales outpaced the rate of inflation in July, which connotes an understanding that the improvement in retail sales was driven by increased demand on top of price increases.
- Weekly Initial Claims 227K (Briefing.com consensus 232K); Prior was revised to 234K from 233K, Weekly Continuing Claims 1.854 mln; Prior was revised to 1.871 mln from 1.875 mln
- The key takeaway from the report is that initial claims remain well below levels typically associated with recession conditions.
- July Import Prices 0.1%; Prior 0.0%
- July Import Prices ex-oil 0.1%; Prior 0.2%
- July Export Prices 0.7%; Prior was revised to -0.3% from -0.5%
- July Export Prices ex-ag. 1.0%; Prior was revised to -0.4% from -0.6%
- August NY Fed Empire State Manufacturing -4.7; Prior -6.6
- July Capacity Utilization 77.8% (Briefing.com consensus 78.6%); Prior was revised to 78.4% from 78.8%, July Industrial Production -0.6% (Briefing.com consensus 0.1%); Prior was revised to 0.3% from 0.6%
- The key takeaway from the report is the understanding that it was depressed by Hurricane Beryl, which reduced industrial production by an estimated 0.3 percentage point and manufacturing output by an estimated 0.3 percent. Industrial production wasn't strong in July, but taking the effects of the hurricane into account, it wasn't as weak as it seems either.
- June Business Inventories 0.3% (Briefing.com consensus 0.2%); Prior 0.5%
- August NAHB Housing Market Index 39 (Briefing.com consensus 43); Prior was revised to 41 from 42
Friday's economic calendar features July Housing Starts and Building Permits at 8:30 ET, followed by the preliminary August University of Michigan Consumer Sentiment survey at 10:00 ET.
Stocks stick near highs ahead of close; Friday's economic lineup
15-Aug-24 15:35 ET
Dow +560.23 at 40568.62, Nasdaq +401.56 at 17594.16, S&P +89.33 at 5544.54
[BRIEFING.COM] The market remains near session highs ahead of the close.
The Department of Energy purchased additional barrels for the strategic petroleum reserve, bringing the total purchased to nearly 45 million barrels. On a related note, WTI crude oil futures settled 1.5% higher at $78.22.bbl.
Friday's economic calendar features July Housing Starts and Building Permits at 8:30 ET, followed by the preliminary August University of Michigan Consumer Sentiment survey at 10:00 ET.
Real estate sector underperforms, clipped by higher rates
15-Aug-24 15:05 ET
Dow +515.47 at 40523.86, Nasdaq +394.56 at 17587.16, S&P +85.53 at 5540.74
[BRIEFING.COM] The three major indices moved mostly sideways at session highs over the last half hour.
Only one S&P 500 sector remains in negative territory while the consumer discretionary (+3.3%) and information technology (+2.4%) sectors lead by a decent margin. The rate-sensitive real estate sector is trading 0.1%, clipped by higher market rates.
The 10-yr yield sits at 3.92% and the 2-yr yield sits at 4.10%.
S&P 500 in second place on Thursday afternoon
15-Aug-24 14:30 ET
Dow +507.19 at 40515.58, Nasdaq +402.45 at 17595.05, S&P +84.87 at 5540.08
[BRIEFING.COM] The S&P 500 (+1.56%) is in second place on Thursday afternoon, up about 85 points.
Elsewhere, S&P 500 constituents Super Micro Computer (SMCI 629.36, +52.27, +9.06%), ON Semiconductor (ON 76.43, +5.35, +7.53%), and Paramount Global (PARA 10.95, +0.72, +7.04%) pepper the top of standings. SMCI and ON push higher alongside general strength in technology stocks, while PARA gets a lift from reports that E. Bronfman Jr. is eyeing a bid for PARA parent National Amusements.
Meanwhile, Montana-based analytics software firm Fair Isaac (FICO 1740.42, -69.33, -3.83%) is today's top laggard, falling off all-time highs from the prior session; losses may be helped along today by disclosure of 3K shares sold by EVP T. Bowers worth approx. $5.1 mln.
Gold higher on Thursday
15-Aug-24 14:00 ET
Dow +500.71 at 40509.10, Nasdaq +394.10 at 17586.70, S&P +83.64 at 5538.85
[BRIEFING.COM] With about two hours to go on Thursday, the tech-heavy Nasdaq Composite (+2.29%) holds a commanding lead atop the major averages.
Gold futures settled $12.50 higher (+0.5%) to $2,492.40/oz, buoyed by this morning's jobless claims reading and improving retail sales data.
Meanwhile, the U.S. Dollar Index is up about +0.5% to $103.04.
Tapestry closed out FY24 with decent results; given the macro headwinds, investors like Q4 (TPR)
Tapestry (TPR +5%) is making a nice move following its Q4 (Jun) earnings report this morning. We wanted to check in to see how this supplier of luxury accessories is doing in the current macro environment. Its flagship brand is Coach, but it owns several other luxury brands, including Kate Spade, and Stuart Weitzman.
- It reported upside EPS, but with notably smaller upside than the past two quarters. Revenue fell 1.8% yr/yr to $1.59 bln, which was in-line. Tapestry lowered its FY25 EPS guidance, but part of that is from the suspension of share repurchase activity due to the proposed acquisition of Capri Holdings (CPRI) and an estimated currency headwind of approximately $0.20 relative to prior guidance.
- The majority of TPR's sales are in North America at 65% of FY24 revs. However, as you can see above, TPR gets impacted quite a bit by FX given its high percentage of international sales (35% of FY24 revs). Speaking of which, Tapestry would have posted +1% revenue growth on a constant currency basis.
- Sales in Q4 were led by international growth, with gains across key regions, including increases of +26% CC yr/yr in Europe with strength across channels, including higher spend from local consumers and tourists, +12% CC in Other Asia with notable growth in Malaysia, Australia and Korea, and +2% CC in Japan.
- However, the recovery in China has been more gradual than originally expected as Q4 sales declined -10% CC. China is TPR's second largest market (15% of FY24 revs) behind only North America. In Greater China, revenue declined as expected given that TPR was lapping 50% growth in the year ago period. TPR continues to navigate a more challenging consumer backdrop in China. In North America, sales declined 1% amid a challenging consumer backdrop.
- Tapestry gave an update on its previously announced deal to acquire Capri Holdings, which owns Versace, Jimmy Choo and Michael Kors. In April 2024, the FTC filed a lawsuit in an attempt to block the proposed acquisition. The company is working expeditiously to close the transaction in calendar year 2024.
The trading action indicates that investors are pleased with how Tapestry closed out FY24. It was not a blowout quarter, but sales growth was strong if you back out North America and China. Given all the macro headwinds and consumers seeking value, investors are pleased with these results as they could have been worse.
Deere praised for better aligning supply with demand; takes sting out of weak market conditions (DE)
Following concerning Q2 results from AGCO (AGCO) and soft construction numbers from Caterpillar (CAT) recently, Deere's (DE) relatively weak Q3 (Jul) performance was better than the market feared, triggering a solid move higher today. Deere did topple earnings and sales estimates in the quarter, continuing to crush on its bottom line as it reigns in expenses. However, sales still fell yr/yr. Management also commented that Ag fundamentals remain muted, and demand in Construction & Forestry has tempered, culminating in another quarter of challenging market conditions.
The stubbornly deflating economic environment has spurred Deere to take further cost-reduction actions and better align its rest-of-year production schedules to target lower year-end inventory levels. Deere's moves mirror those taken by AGCO, which is rapidly cutting production to right-size dealer inventories in hopes that demand becomes more balanced in 2025. The result of Deere's actions is a full order book across all segments for the remainder of FY24 (Oct).
- In Q3, all core business lines recorded yr/yr sales drops, with the sharpest contraction occurring in Production & Precision Ag, which endured a 25% decline. Lower shipment volumes were the culprit, partially offset by price realization. The tumbling sales clipped operating profits, which plunged by 35% yr/yr.
- Small Ag & Turf and Construction & Forestry performed moderately better, registering 18% and 13% revenue declines, respectively. However, operating profits, and subsequently margins, across these segments slipped by a similar degree as Production and Precision Ag.
- Small Ag & Turf is suffering from a lackluster macroeconomic environment. Commodity prices play a key role in quarterly performance, making a global rebuilding of grain stocks an issue as it hikes supply and lowers prices. Meanwhile, elevated interest rates and geopolitical uncertainty continue to weigh on purchase decisions, which is trickling into all end markets.
- In Construction & Forestry, U.S. government spending has provided some assistance, but not enough to offset a sequential slowdown in single-family housing starts that is compounded by a continued decline in multi-family housing starts and persistent problems in the commercial real estate market. Deere's commentary is similar to Caterpillar's. However, Caterpillar mentioned that residential sales to North American customers climbed, reflecting healthy demand for new housing.
- Looking ahead, Deere does not anticipate conditions strengthening in the near term. Most of its FY24 growth targets remained unchanged, while a few worsened. The company forecasts the same yr/yr declines across Production & Precision Ag and Small Ag & Turf, around 20-25%. Conversely, Deere expects construction equipment in the U.S. and Canada to fall 5-10% compared to down 5% to flat. As a result, its overall net sales outlook for this segment changed to down 10-15% from down 5-10%.
Market conditions remain unfavorable, and there are a few signs things will turn around soon. However, given peer's recent results and comments, investors are not surprised by this. Instead, they are seeing the glass half full, commending Deere's initiatives to better align production with demand, which should position it better to respond effectively once the market turns.
Walmart up sharply despite modest beat due to strong comps and general merchandise improvement (WMT)
Walmart (WMT +6.5%) is higher after reporting Q2 (Jul) results. The retail giant beat on EPS and revenue although the upside for both was smaller than typical. It also issued downside EPS guidance for Q3 (Oct) and while Q3 revenue guidance was in-line, the mid-point was a bit light. The highlight was WMT raising FY25 EPS and revenue guidance by more than the Q2 upside, which we read as higher confidence about Q4 (Jan) given that the Q3 weakish guidance.
- Q2 sales, operating income, and EPS all exceeded the top end of prior guidance. On the call, WMT said it has not been experiencing a weaker consumer overall. In the US, for both Walmart and Sam's Club, WMT says comp sales were fairly consistent throughout the quarter. Food continues to be strong, but it was encouraging to see improvements in general merchandise. Also, its US Health and Wellness business in Walmart and Sam's Club saw strong comps due to sales of GLP-1 drugs.
- Its Walmart US segment performed well with comps (exc fuel) up +4.2%, up from +3.8% in Q1. We think this strong comp is a key reason why the stock is higher. Recall in our preview we noted some recent comments from WMT that it said every quarter was not going to be as good as Q1, and that the current quarter would be its most challenging comp for the year (lapping +6.4%). We think investors are pleased with this comp given WMT's cautious comments.
- Comp sales reflected strength in transaction counts and unit volumes, across both stores and eCommerce channels. WMT said that its value-convenience proposition continues to resonate with customers and members. WMT also noted it saw share gains across income cohorts primarily driven by upper-income households. Also, Walmart Connect advertising sales grew a healthy 30% on strong growth in advertiser counts, including marketplace sellers.
- Sam's Club US comps (excl fuel) had been trending lower in recent quarters: +7.0%, +5.5%, +3.8%, +3.1% but they have rebounded in the last two quarters to +4.4% in Q1 and now +5.2% in Q2. Comps were led by food and health & wellness as well as increases in transactions and unit volumes. Sam's Club also gained dollar and unit market share in grocery and general merchandise categories, including apparel and electronics. Growth in eCommerce sales was solid at 22%.
- The company does not provide comps for its Walmart International segment, but sales grew to $29.6 bln, or 8.3% CC, reflecting strength in Walmex, China, and Flipkart. Food and consumables did well, and it saw improvement in general merchandise. WMT also saw increased transaction counts and unit volumes. eCommerce sales up 18% while its advertising business grew 23%, led by Flipkart and Walmex.
- WMT says consumers continue to look for value to maximize their budgets while leaning into seasonal celebrations. Upper-income households account for the majority of gains, even while WMT grows sales and share among middle and lower income households. WMT is highly encouraged by customer uptake of its new private label food brand (called bettergoods) and the early excitement for the re-launch of its young adult fashion brand (No Boundaries).
Overall, the Q2 upside was pretty modest, however, we think investors are bidding up shares because Q2 was better than feared given the July jobs data in early August and given WMT's cautious comments in late June. A big highlight was the strong Walmart US comp, despite lapping a strong result last year. What really helps Walmart is its higher exposure to groceries and everyday necessities. In FY24, roughly 60% of Walmart US sales were groceries while 26% were general merchandise. Contrast that with Target, which is 23% Food & Beverage. Also, what struck us was WMT being a bit more bullish on the general merchandise side of the business than we have heard in the past several calls.
Cisco jumps following Q4 results as inventory headwinds ease and AI spending accelerates (CSCO)
Cisco (CSCO +7%) is beginning to break free from the customer-wide inventory digestion headwind that crippled growth during FY24 (Jul), triggering mounting confidence from investors today in the prominent networking component supplier and software developer. As a result, CSCO is bouncing strongly off one-year lows.
- Inventory and economic woes were still prevalent in Q4. CSCO reported adjusted EPS of $0.87, a 24% drop yr/yr, and revs of $13.64 bln, a 10% contraction. However, total product orders expanded by 14%, 8 pts of which stemmed from Splunk, CSCO's $28 bln purchase it closed on in March, a sign that inventory adjustments are mostly over. Demand was balanced across geographies, with product orders up 6% in the Americas and Europe and 8% in Asia. Meanwhile, all customer markets exhibited strength, especially from the public sector.
- Splunk may be a critical differentiator. Like its rival Datadog (DDOG), Splunk is pouncing on outsized demand as security and observability remain crucial in monitoring data sets and pinpointing issues. CSCO closed on Splunk at a favorable time, as DDOG pointed out last week, that the demand environment is showing strength across enterprises and stability from small and medium-sized businesses.
- AI also plays a factor in helping CSCO stand out competitively. The company's Hypershield, an AI-powered security system, is enjoying positive feedback from customers with early access to the product. CSCO has already crossed the $1.0 bln mark in AI orders and expects an additional $1.0 bln in AI product orders in FY25. However, given CSCO's total operations, the AI-related demand is relatively minor.
- CSCO's FY25 guidance underpins sustained upward momentum. The company expects adjusted EPS of $3.52-3.58 and revs of $55.0-56.2 bln, a 3% improvement yr/yr at the midpoint. Also, CSCO announced an approximately 7% cut to its workforce to better streamline operations as part of its broader plan to pivot more resources into the fastest growth areas of its business, particularly AI, cloud, and cybersecurity, all of which are embedded in its FY25 outlook.
CSCO's Q4 report still suffered from a macroeconomic climate that has kept inventories high and prompted increased budget scrutiny. However, the market is placing more weight on CSCO's FY25 guidance and the fact that it exited FY24 with customer demand steady, balanced strength across its portfolio, and enterprise customers finally upgrading their infrastructure in preparation for AI.
The stock is still underperforming many of its peers, including Hewlett Packard Enterprise (HPE) and Ciena (CIEN), both of which report earnings in the coming weeks. More striking has been the disparity between CSCO and Arista Networks (ANET), which is better capitalizing on AI opportunities, aided by its top two customers, Meta Platforms (META) and Microsoft (MSFT). Nevertheless, CSCO is displaying healthy progress, with three of the top four hyperscalers deploying its Ethernet AI fabric. The company is also on track to double its AI product orders in FY25. Following a lengthy period of headwinds, CSCO may finally be turning a corner and is on the cusp of a considerable comeback.
Brinker stumbles with rare EPS miss despite robust traffic and comps
Brinker Intl (EAT -10%) is trading sharply lower after wrapping up FY24 on a down note. This restaurant operator (Chili's, Maggiano's) posted a rare EPS miss, following seven consecutive EPS beats. Revenue rose a healthy 12.3% yr/yr to $1.21 bln, which was better than expected. Guidance was a problem area. Adjusted EPS for FY25 is expected at just $4.35-4.75, which was below analyst expectations. However, FY25 revenue guidance was better than expected.
- Comps were quite good at +13.5% (Chili's +14.8%; Maggiano's +2.5%). The comp increase at Chili's was primarily due to increased menu pricing and higher traffic. EAT also said that the launch of the "Big Smasher" burger and the strength of Chili's advertising highlighting value drove traffic during JunQ. Additionally, the Chili's traffic increase of 5.9% includes a negative impact of approximately 2.3% from EAT's decision to de-emphasize virtual brands.
- EAT says comps benefitted because the launch of its Big Smasher and its Triple Dipper went viral on TikTok. As a result, Chili's experienced a step change in its business. A majority of the incremental guests were new to Chili's, so EAT responded quickly by adding labor to ensure it could handle the increased volume.
- In terms of why EAT missed on EPS, the company did not specifically give a reason. However, it did say that with the traffic spike at Chili's during JunQ, the company chose to accelerate investments in key areas such as repair and maintenance to ensure its buildings were welcoming and well-maintained. EAT also increased hiring to staff up and be able to take care of the guests.
- Looking ahead, while the industry has softened in July due to rocky macros, EAT says its quarter-to-date sales trends have remained strong, but at a more sustainable level. July sales for Chili's were in the high single digits, including positive traffic. In terms of the downside FY25 EPS guidance, EAT said that, even though it's not experiencing the same softness as others, it did contemplate the macros in its guidance.
Overall, this was a rough way to end FY24. Sales and comps were great, partly fueled by going viral on TikTok. However, higher MRO and labor hires seem to have clipped EPS results. Probably more worrisome was the EPS guidance for FY25, which was a good bit light. The silver lining is that it sounds like EAT is just being cautious given the macro environment, rather than seeing anything in their data. However, this is a reminder that consumers are dining out less.
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