Daily stocks in the news

Jabil (JBL), a manufacturing and product design company, is set to benefit from the proposed sale of its mobility business, as its margins and earnings growth prospects shine brighter. The company's stock price is on the rise after revealing its preliminary agreement to sell the mobility unit to China's BYD Electronic Company for approximately $2.2 billion. The deal, pending due diligence, resonates well with the market, as shedding the mobility division, responsible for producing components and encasements for devices including Apple's iPhones and iPods, will reduce exposure to the slow-moving consumer electronics market. This unit constitutes a significant portion of Jabil's overall business, with about $4.4 billion in annual sales, representing 10-12% of total sales. Additionally, divesting the mobility business would lessen Jabil's dependence on Apple, which contributes nearly 20% of its revenue, and would also mitigate geopolitical risk through the sale of its manufacturing facilities in China. The move to divest is particularly appealing because Jabil intends to channel the sale proceeds into high-growth opportunities, notably its flourishing automotive business that saw a remarkable 60% revenue surge in the last quarter. The strong performance in the automotive sector, coupled with success in other growing areas like renewable energy infrastructure and cloud computing, translated into positive Q3 results in mid-June. Although the company remains cautious due to weakened demand in consumer-facing markets such as smartphones, exiting the mobility business is expected to shift Jabil's outlook to a more bullish trajectory. Furthermore, the company plans to allocate a portion of the proceeds to share buybacks, which is welcomed news for investors. Ultimately, divesting the mobility business is an attractive move for Jabil, as it stands to enhance its margin and earnings growth by focusing on robust end markets like electric vehicles and cloud computing.

AppFolio (APPF), a software company catering to the real estate industry, is celebrating new heights with its stock hitting a 52-week high following an "Outperform" rating upgrade from William Blair, just one week after another upgrade from Stephens. These consecutive upgrades underscore the increasing optimism surrounding AppFolio. The company offers software solutions to landlords and investment firms for efficient property management, including tenant screening, payment processing, and insurance-related risk management. Benefiting from the AI-related surge, AppFolio finds itself in a favorable position with property management firms looking to enhance efficiency amidst rising costs. The majority of AppFolio's revenues stem from subscription fees, tied to the size and type of properties its customers manage. Despite the challenging economic climate affecting spending, particularly in software, AppFolio has been responsive to the situation, undergoing restructuring measures including a workforce reduction of almost 9%. Notably, the company's survey of property managers revealed significant potential for AI-driven automation in tasks, which could substantially boost its subscription revenue in the coming quarters. AppFolio's expansion plans include tapping into the affordable housing market with AI solutions that alleviate efficiency challenges. While the stock has experienced significant growth in 2023, riding the wave of its potential in the real estate and tech sectors, it's worth noting that the broader real estate sector's performance has been more modest. Nevertheless, AppFolio's focus on digital transformation in property management, combined with the benefits of AI, positions it for compelling long-term growth.

3M (MMM) is edging closer to resolving its litigation concerns, which have cast a shadow over the company's performance in recent years. The company is reported to be nearing a settlement that could put an end to the longstanding legal issues linked to allegedly faulty earplugs sold to the military. This positive development is driving the stock price up, as it would remove the uncertainty that has negatively impacted 3M's valuation due to the pending lawsuits. The potential settlement amount, around $5.5 billion, is significantly lower than anticipated, possibly even 67% less than expected. Despite this, the final settlement amount remains subject to ongoing negotiations. While 3M has faced multiple challenges, such as softness in consumer-facing markets, the prospective resolution of these lawsuits is seen as a crucial step toward removing a significant overhang and gaining more clarity on the company's future prospects.

Abcam's (ABCM) shares are facing a decline as investors express disappointment over the terms of its merger deal with Danaher. After exploring various strategic alternatives, Abcam has agreed to be acquired by Danaher for $24.00 per share in cash, which represents a modest 3% premium to the previous closing price. The deal would see Abcam operating independently within Danaher's Life Sciences segment, with the transaction expected to finalize in mid-2024, pending regulatory and shareholder approvals. Despite the excitement generated by Abcam's potential sale, the relatively small premium offered by Danaher has left some investors dissatisfied, especially considering the significant appreciation in Abcam's stock since the initial announcement of pursuing a sale. While Danaher's investors view the deal positively as it strengthens the company's Life Sciences segment, Abcam shareholders' reaction reflects a "buy-the-rumor, sell-the-news" sentiment, highlighting the contrasting perceptions surrounding the acquisition.

Previous update:

Marvell (MRVL) is facing a downward trend in its stock price, despite delivering decent results for the second quarter of the fiscal year. The semiconductor company's Q2 performance was moderately positive, although its guidance for the upcoming Q3 remained in line with expectations. Despite the positive aspects, Marvell encountered challenges across its various segments. The Data Center, which is Marvell's largest market, witnessed a 29% year-on-year decline in segment revenue, although it showed a 6% sequential increase, driven by growing demand for optical products linked to cloud AI expansions. On the other hand, the enterprise on-premise portion of the Data Center market experienced a significant revenue drop. Sequential storage data center revenue growth was reported in Q2, with expectations of modest growth in Q3. Nevertheless, the demand for storage end market remains depressed, and the recovery timeline has been extended. Carrier infrastructure revenue declined due to demand weakness in the wired portion of the market. While wireless revenue continued to grow, challenges in the macro environment are expected to cause a sequential reduction in Q4. In the enterprise networking sector, revenue declined, reflecting inventory corrections impact. The consumer and automotive/industrial segments exhibited growth, yet they are Marvell's smallest segments. In summary, investors are reacting unfavorably to Marvell's Q2 results and guidance. Despite pockets of strength, such as the AI data center business, each of the three largest segments showed areas of weakness and inventory adjustments. The strong wireless unit is also anticipated to slow down by Q4, and the data center storage recovery timeline has been delayed. After a promising Q1, investors had hoped for a more optimistic outlook for the second half of the year, but the presence of multiple areas of weakness has dampened these expectations.

Affirm (AFRM), the buy now, pay later company, has received significant approval as its latest report presents an encouraging outlook. Despite facing challenges in a rising interest rate environment, Affirm's Q4 2023 results have exceeded expectations and its projected revenue guidance for Q1 2024 is showing positive growth. With about 18% of the float held on the short side, there have been skeptics regarding AFRM's performance, leading to a notable short squeeze amplifying its current upward trajectory. While the impact of higher interest rates has undeniably posed difficulties for AFRM, the company has managed to counter this headwind through various factors that have contributed to its better-than-anticipated financial performance.

On the demand side, growth in Gross Merchandise Volume (GMV) has slowed compared to the previous year, attributed to decreased discretionary spending and fewer consumer loans. However, despite this decline, there is a positive note as GMV growth increased on a quarter-to-quarter basis, indicating a potential stabilization. AFRM is strategically benefiting from partnerships in the travel industry, including collaborations with Booking Holdings and Royal Caribbean. Additionally, the success of its direct-to-consumer segment, particularly the Affirm Card, has contributed significantly to GMV.

While rising interest rates have impacted Affirm's Revenue Less Transaction Costs (RLTC) growth, the company's ability to manage funding costs and introduce pricing initiatives has helped offset these challenges. Moreover, concerns over rising interest rates leading to higher delinquencies have been proven wrong, as Affirm's 30+ day delinquency rate improved in Q4, reflecting the strength of its consumer base and underwriting capabilities.

In conclusion, Affirm is navigating the complex high-interest rate environment more adeptly than anticipated by many market participants. Although risks persist, the company's proactive measures, such as expanding its focus on travel and entertainment partnerships, demonstrate its resilience and ability to mitigate the effects of rising rates.

Nordstrom (JWN) has faced headwinds in the second half of 2023 that have prevented the company from revising its fiscal year 2024 guidance despite outperforming expectations in the second quarter (Jul). Although Nordstrom's Q2 sales declined by 7.9% year-over-year to $3.77 billion, the decrease was less severe than anticipated, particularly due to the conclusion of Canadian operations and timing issues related to its anniversary sale. Nordstrom's earnings per share (EPS) beat the forecast at $0.81, marking its largest beat since the third quarter of 2020, reflecting positive steps towards enhancing profitability. However, the stock is facing a decline. The management has continued to observe a cautious consumer sentiment and remains uncertain about how shoppers will respond to persistent inflation, elevated interest rates, and the return of student loans in the latter half of the year. Additionally, Nordstrom is witnessing a slowdown in sales trends across its core Nordstrom banner and Nordstrom Rack off-price banner in the third quarter. Furthermore, an emerging concern is the gradual increase in delinquencies within Nordstrom's credit card business, which could lead to higher credit losses in the second half of 2023 and into 2024.

Given the prevailing uncertainty, Nordstrom is maintaining a conservative stance in its FY24 guidance, reiterating an EPS range of $1.80 to $2.20 and forecasting a 4-6% decline in revenue year-over-year, despite the substantial beat in Q2. Investors seem less forgiving of the company's decision to keep its full-year outlook unchanged after such a remarkable quarterly performance.

In the broader context, while the retail apparel sector showed relative resilience during the first half of the year, it appears that the upcoming back-to-school and holiday seasons might not sustain this positive momentum for the latter part of the year. Complicating matters, Nordstrom is grappling with significant losses from theft, alongside rising credit card delinquencies. On a more positive note, Nordstrom Rack, similar to TJX, benefits from consumers seeking value amid trading down. Brands like HOKA, On, and NIKE are also garnering favorable responses from shoppers. Nevertheless, it might be prudent to await developments and a potential shift in the challenges facing Nordstrom before making investment decisions.

Amid a challenging business climate, Workday (WDAY) has managed to deliver a noteworthy performance with a beat-and-raise report in Q2. Despite ongoing spending scrutiny, the human capital management (HCM) software company showcased its resilience. Particularly, Workday experienced robust demand for its financial management platform, highlighting the essential nature of its offerings, as emphasized by CEO Carl Eschenbach. Workday's HCM for Finance platform has gained exceptional relevance in the current landscape. With companies seeking heightened productivity and efficiency while tightly managing expenses and budgets, the appeal of the company's financial management tools is evident. Although Workday's growth isn't experiencing a surge, it does demonstrate healthy demand. Subscription revenue grew by nearly 19% year-over-year to reach $1.62 billion, surpassing the company's guidance range of $1.611-$1.613 billion. Importantly, this growth rate remains consistent with the previous quarter's increase of 20%, indicating that customer spending behaviors have not deteriorated. During the earnings call, Workday disclosed that both new deals and renewals are extending contract durations, leading to significant backlog growth outpacing the 24-month backlog expansion. Furthermore, early renewals exceeded expectations, contributing around 1.5% to the 24-month backlog growth. Alongside the strong results and improved FY24 subscription revenue guidance, Workday's positive outlook on its artificial intelligence (AI) prospects garnered attention. The company revealed plans to amplify investments in large language model utilization and application. Workday is developing product capabilities that incorporate generative AI for tasks like content search, summarization, and document understanding. While most of these AI-powered features will be integrated into current subscriptions, Workday also envisions introducing new AI capabilities with direct monetization potential.

Workday's margins and profitability are also moving in a favorable direction. In Q2, non-GAAP operating margin surged to 23.6%, a substantial increase from 19.6% in the same quarter of the previous year, driven primarily by revenue outperformance and expense timing. Additionally, the company raised its FY24 operating margin guidance to 23.5% from 23%, reflecting its disciplined approach to spending and expenses.

Overall, Workday is demonstrating strong execution within a challenging macro environment, showcasing the robust value proposition of its HCM platform and its prominent position in the industry.

Intuit (INTU) has concluded its fiscal year 2023 on a positive note, leading to a 2.4% increase in its stock following the release of its Q4 (July) earnings report. Intuit's focus on catering to small businesses and consumers through platforms like TurboTax, QuickBooks, Mint, Credit Karma, and Mailchimp was evident in its performance. The company exceeded earnings per share (EPS) expectations by a significant margin, while its revenue outperformance was more moderate. Looking ahead, its Q1 (October) guidance presented a mixed picture, with a downside in EPS but revenue projections aligning with expectations. The standout performer once again was Intuit's Small Business and Self-Employed Group (SBSE), which achieved a 21% year-over-year revenue growth, reaching $2.1 billion. QuickBooks Online accounting revenue experienced a 22% growth, driven by factors such as customer expansion, higher effective prices, and a shift in product mix. Online services also displayed a robust growth of 20% in Q4, primarily propelled by payroll, Mailchimp, payments, capital, and time tracking functionalities. Credit Karma's performance has faced challenges in recent quarters. While Q4 revenue exhibited an 11% year-over-year decline, it managed a 3% sequential growth to reach $424 million. The yearly contraction was mainly influenced by macroeconomic headwinds affecting personal loans, auto insurance, home loans, and auto loans. Nevertheless, the growth in credit cards and Credit Karma Money partially offset these declines. A positive aspect to highlight is Credit Karma's increasing stability, leading to improved year-over-year performance in Q4 compared to Q3. Intuit's overarching vision when acquiring Credit Karma was to establish a unified consumer platform that integrates financial management, money management, and tax-related services. After several years of experimental endeavors, the company reported significant progress in the past year. The number of Credit Karma members transitioning to TurboTax customers surged fivefold, instilling confidence for the coming years. While its Consumer and ProTax Groups segment remains relatively small outside of tax season, Q4 revenues experienced a 12% year-over-year decrease, amounting to $128 million. TurboTax units declined by 5% for the year, primarily due to taxpayers who filed in previous years to access pandemic-era stimulus and tax credits but did not file taxes this season. With fiscal year 2023 concluded, the company unveiled its FY24 guidance, showcasing positive prospects with EPS projections surpassing expectations and revenue forecasts aligning with estimates. Segment-wise, SBSE is expected to grow by 16-17%, Consumer by 7-8%, and Credit Karma ranging from a decline of 3% to a growth of 3%. In summary, Intuit's performance in concluding FY23 was solid, as reflected by the impressive Q4 results. While the relatively conservative Q1 guidance and recent stock price gains have impacted market sentiment, the FY24 guidance was encouraging. Despite macroeconomic challenges, Intuit's SBSE segment continues to perform well, and the stabilization of Credit Karma's performance is a positive sign for the future.

Previous update:

Splunk (SPLK), a company specializing in cybersecurity and data analytics, released a quarterly report that has eased concerns about potential budget constraints among its customers. While not achieving the same impressive performance as NVIDIA in terms of Q2 and forward estimates, Splunk's report exceeded expectations, which came as a significant surprise. Prior to the report, there were worries that customer spending might tighten again, similar to what led to weak revenue guidance in Q4. Despite acknowledging the uncertain selling environment, Splunk comfortably surpassed EPS and revenue projections. It also raised its guidance for FY24 revenue and total Annual Recurring Revenue (ARR), propelling its shares to new 52-week highs.

A pivotal aspect of Splunk's growth strategy is its transition to a cloud-based model. A critical gauge of this progress is Cloud ARR, a demand metric that observers closely monitor. Cloud ARR growth has been impeded due to intensified scrutiny of IT spending and a slowdown in cloud migrations. Although Cloud ARR's year-over-year growth in Q2 was 27%, a decrease from the 32% growth last quarter, the decline was less severe than feared by some investors. Additionally, the cloud segment of Q2's software bookings reached 64%, aligning with the upper end of Splunk's projected range of 55-65%.

While demand has not fully rebounded, it is stabilizing concurrently with Splunk's efforts to enhance margins and cash flow. The company has achieved this through effective cost management, as exemplified by a 3% reduction in non-GAAP operating expenses in Q2. As a result, Splunk raised its operating margin guidance for FY24 to 21.0-21.5%, marking a 300 basis points increase from its prior forecast. It also adjusted its higher free cash flow projection to $855-$875 million.

In summary, Splunk is not operating at full capacity yet, but its report indicates a stabilization in the demand landscape. The company is positioning itself to leverage emerging AI opportunities by launching Splunk AI, a suite of AI-powered offerings for faster detection and response to data security issues. Coupled with diligent cost management, this brightens the outlook for revenue growth and suggests a more robust performance ahead.

Dollar Tree (DLTR) is experiencing a notable decline in its stock price following the release of its Q2 (July) report. While the dollar store chain managed to exceed expectations in terms of both EPS and revenue, concerns have arisen due to the troubling EPS guidance for Q3 (October), which fell considerably below analyst projections. This discrepancy between revenue and EPS often indicates margin compression, highlighting the ongoing pressure on margins that DLTR has been grappling with. In Q2, the enterprise same-store comps performed impressively, achieving a +6.9% growth (Dollar Tree +7.8%; Family Dollar +5.8%), in line with previous mid-single digits guidance and surpassing Q1's +4.8% comparison. DLTR projected mid-single-digit enterprise comps for Q3 and raised its full-year comp guidance from low- to mid-single digits. Although sales and comps have shown positive results, the concern lies primarily in margin compression. The Q2 operating margin declined to 3.9% from 5.7% in Q1 and 7.5% in the same period last year. Factors contributing to this decline include lower merchandise margin due to various reasons such as last year's margin benefit from the $1.25 rollout, unfavorable sales mix, product cost inflation, and increased shrink. DLTR noted a shift in consumer purchasing behavior towards consumables and away from discretionary items within the industry. The company believes that this change signifies a return to a pre-pandemic balance after elevated spending in discretionary categories for years. DLTR emphasizes its strength in consumables, with high-volume growth in frozen and center-store food categories. It's also embracing private brands as a growth avenue, expanding and enhancing its private brand assortment. Unfortunately, despite positive aspects, this quarter was a disappointment for investors due to the pressure on margins caused by the shift from discretionary items, unfavorable sales mix, and elevated shrink. DLTR anticipates this margin pressure to persist throughout the latter part of the year, as indicated by its Q3 EPS guidance. The broader retail spectrum within the off-price/value segment has shown mixed performance, with TJX and ROST performing well, while BURL experienced significant declines. Upcoming reports from retailers like Big Lots (BIG), Five Below (FIVE), Ollie's Bargain Outlet (OLLI), and Dollar General (DG) will provide further insight into the sector's performance.

Burlington Stores (BURL) is facing a sell-off in response to its Q2 (July) report, contrasting with the positive reactions experienced by its peers like Ross Stores (ROST) and TJX (TJX). While the off-price apparel retailer managed to surpass earnings expectations for the quarter and meet revenue forecasts, the reason behind the negative investor sentiment lies in the narrowing of BURL's FY24 (January) guidance, trimming the upper end of its projections. BURL's new expectations include an EPS range of $5.60 to $5.90 (revised from $5.50 to $6.00), revenue growth of +11% to +12% (down from the previous +11% to +14%), and same-store sales growth of +3% to +4% (lowered from +3% to +5%). The cause of this revision can be traced to the ongoing economic pressure felt by BURL's core low-income customer base, mirroring the situation observed with Foot Locker (FL). As the cost of living rises, lower-income households are disproportionately affected, forcing them to constantly reprioritize their discretionary spending amidst inflationary pressures. Consequently, BURL's Q2 same-store sales expansion was limited to +4%, representing a 3% comparison to 2019 and resembling the trend seen in Q1. This performance was disappointing to the company, which had been targeting trade-down shoppers in anticipation of economic challenges driving more affluent individuals to their stores. Yet, BURL has not observed the desired level of trade-down activity, largely due to the overall strength of the economy and low unemployment rates.

Despite these challenges, there were positive aspects in Q2. BURL managed to increase its gross margins by 280 basis points year-over-year to 41.7%, with improvements in merchandise margins and a decrease in freight expense, similar to ROST's margin dynamics. However, while BURL is striving to attract higher-income customers by enhancing its assortment of recognizable brands and offering value across various price points, this strategy has not yielded substantial benefits yet.

In summary, BURL's Q2 report might have been disappointing in comparison to ROST and TJX's favorable results, but it doesn't necessarily signal significant headwinds for the off-price retail sector as a whole. However, it does raise concerns for retailers heavily reliant on lower-income shoppers. This situation could potentially affect companies like Dollar Tree (DLTR), currently experiencing a sell-off due to underwhelming Q2 results, as well as Big Lots (BIG), Five Below (FIVE), and Ollie's Bargain Outlet (OLLI) as they report their earnings soon. While the "trade-down" effect has been observed, not all retailers will benefit equally, particularly if they have established a brand associated primarily with catering to low-income households. Store revamps, similar to those being undertaken by BURL, might hold the key to attracting higher-income shoppers to these establishments.

Snowflake (SNOW) faced a tepid response to its Q2 results and outlook as its growth rate cools amidst what CEO Frank Slootman termed an "unsettled demand environment." The data analytics platform provider managed to surpass expectations for 2Q24 results and maintain its FY24 product revenue guidance at $2.6 billion. However, SNOW has encountered a slowdown in growth due to reduced spending from major enterprise customers this year, leading to a stagnation in its stock performance. While the demand situation has stabilized to some extent after a challenging Q1, the anticipated substantial upswing hasn't materialized either. Marked by a 37% year-over-year growth, SNOW's product revenue reached $640.2 million, comfortably surpassing its guided range of $620-$625 million. Notably, product revenue serves as a vital gauge of customer expenditure on SNOW's platform for data storage and analysis. Worth remembering is SNOW's business model rooted in consumption rather than subscriptions, making it susceptible to top-line volatility as customer spending patterns shift. While surpassing its product revenue projection is a positive sign, the emphasis remains on the growth rate, which continues to decelerate.

In the previous quarter, product revenue had expanded by 50%, following growth rates of 54% and 67% in 4Q23 and 3Q23 respectively. Although SNOW's Q3 product revenue guidance of $670-$675 million aligned with expectations, it does signal a further decline in growth to the range of 28-29%. During the earnings call, CFO Michael Scarpelli acknowledged that persisting challenges, which have been hampering growth, are likely to disappoint investors. This revelation isn't a complete shock, given Datadog's (DDOG) warning about larger cloud-native customers tightening their cost belts, leading to downside revenue projections for both Q3 and FY23.

Nevertheless, it's not all bleak for SNOW. The company's prudent control over workforce expansion and a robust product gross margin of 77.9% have translated into improved profitability. Non-GAAP operating margin surpassed expectations at 8%, compared to the projected 2%, and EPS demonstrated substantial improvement from $(0.70) in the corresponding period of the prior year to $0.22.

Looking forward, SNOW anticipates a decline in non-GAAP operating margin to 4% in Q3, although the company has established a history of exceeding its guidance. Additionally, SNOW expresses optimism about its prospects in artificial intelligence (AI), citing the growing prevalence of data sharing and large language models (LLMs). A strategic partnership with NVIDIA (NVDA) announced in June enables businesses to create LLMs utilizing SNOW's data center product.

In summary, SNOW's Q2 results managed to exceed apprehensions, yet its cautious outlook and commentary on the spending landscape have generated disappointment, offering sufficient rationale for investors to consider divesting from a high-priced stock with a price-to-sales ratio exceeding 20x.

Autodesk (ADSK) is enjoying notable gains following its Q2 (Jul) earnings report, with a solid EPS beat and slight revenue outperformance. The company, renowned for its provision of 3D computer-aided design (CAD) software primarily targeting architects and civil engineers, has managed to provide a positive market response amidst concerns over rising interest rates potentially impacting construction markets. The comfort derived from the positive performance is evident. ADSK's portrayal of Q2's overall market conditions as akin to the preceding quarters is reassuring. Despite the challenging macro environment's continued dampening effect on new subscriber additions, Q2 showcased robust financial results. The company's Q1 conference call highlighted a strong cohort of Enterprise Business Agreement (EBA) renewals scheduled for the latter half of the year. These renewals, initiated three years ago during the pandemic's onset, have since demonstrated substantial adoption and usage, increasing the likelihood of further renewals. Surprisingly, some of this strength manifested in Q2, earlier than expected, subsequently bolstering billings, free cash flow, and subscription revenue. Key among ADSK's metrics are billings, which witnessed an 8% year-over-year decrease to $1.095 billion, a contrast from Q1's 4% growth. This transition from upfront to annual billings for multiyear contracts, initiated on March 28, has impacted billings growth this year, offering context to the decrease. Despite the associated challenges, this shift is expected to influence the company's free cash flow negatively in FY24 and somewhat in FY25. Looking ahead, ADSK notes that the Q2 momentum and early expansion of some EBAs due for renewal later in the year mitigate the likelihood of more cautious forecast scenarios. While foreign exchange will pose a challenge to revenue growth and margins in FY24, its impact should moderate in the second half. A noteworthy observation is the emergence of some evidence suggesting multi-year customers may be transitioning to annual contracts during Q2. While not a trend as of yet, ADSK is monitoring the situation, acknowledging the potential impact on total Remaining Performance Obligation (RPO) growth rates.

On the whole, ADSK's Q2 report stands as an impressive performance. Representing the company's largest EPS beat in the past five years, the upbeat EPS guidance further reinforces this achievement. The report's positive implications extend beyond ADSK, possibly boding well for the broader construction market. Although some concern arises from the observation of multi-year clients shifting to annual contracts, the high renewal rates and prudence of clients suggest this might not significantly affect the company. Despite being unlikely to break the long-term sideways trading pattern, this report marks an encouraging step forward for ADSK.

Previous update:

Foot Locker (FL) faced a significant setback as it revised its FY24 (January) outlook downwards for the second consecutive quarter, resulting in a sharp decline in its stock price by 30%. The company's weak performance was attributed to deteriorating consumer demand throughout Q2 (July). Despite achieving earnings and sales growth that met analyst expectations, the positive results failed to counter the negative impact of reduced consumer demand, leading to a substantial sell-off. The company's struggles can be traced back to its plan outlined in March, termed the "Lace Up" plan, which aimed to reset the company's trajectory for 2023. Unfortunately, the weak sales in the first half of the year were not anticipated, primarily affecting the lower-end consumer segment. The challenging economic environment played a role in these difficulties, and this trend was evident in Q2, particularly affecting the back-to-school season. Persisting challenges in store traffic, which surfaced in Q1, continued throughout Q2, reflecting a cautious approach by consumers. In response, Foot Locker engaged in higher-than-expected promotional activities to compete for consumer spending and manage inventory effectively. Despite efforts, demand conditions have not improved through August, leading to a downward revision in sales and margin projections for the year.

A positive aspect emerges in Foot Locker's commitment to reducing its inventory position. The company expects flat to slightly lower inventories in FY24, positioning itself better for the holiday season and FY25. However, despite these efforts, the overall financial results and FY24 guidance were disappointing.

In Q2, Foot Locker reported an EPS of $0.04, its weakest quarter since the beginning of the pandemic. Revenue saw a 9.9% year-over-year decline to $1.86 billion, marking one of the lowest sales quarters since 1Q20. Same-store sales growth contracted by -9.4%. Looking ahead, the company expects EPS of $1.30-1.50 for the year, a significant drop from the initial projection of $2.00-2.25. Revenue is forecasted to decline by 8.0-9.0% year-over-year, worse than the previous forecast of a 6.5-8.0% decrease, with comparable store sales expected to decline by 9.0-10.0%.

Despite the current challenges, Foot Locker's ongoing store remodels could play a role in a potential turnaround. Similar to Dick's Sporting Goods, the company is transforming its stores to create a more athlete-friendly environment, enticing foot traffic and defending against e-commerce competition. The retail segment of shoes and apparel, often classified as the "try-before-you-buy" category, provides an advantage to physical retailers.

While the market's reaction might appear exaggerated, with shares falling below pandemic lows and erasing a decade of gains, the correction is in line with Foot Locker's FY24 P/E ratio before the guidance adjustment, at around 12x. Foot Locker's efforts to drive profitable growth hold promise in the long term, but a substantial sales jump and improved economic conditions for lower-end consumers are essential for a meaningful turnaround in the stock's performance.

Williams-Sonoma (WSM), a company specializing in furniture and home decor, faced a challenging start to the week, witnessing a approximately 7% drop in its stock ahead of its Q2 earnings report, which ultimately turned out to be a mixed outcome. Investors had anticipated weaker results from the owner of Pottery Barn, especially after fellow furniture retailer La-Z-Boy (LZB) lowered its Q2 revenue expectations based on recent spending trends. As anticipated, WSM encountered sluggish demand for larger discretionary items, resulting in a nearly 13% year-over-year decrease in revenue to $1.86 billion, falling short of analyst predictions. This decline in sales, the sharpest in several years for WSM, was influenced by a competitive pricing environment, although CEO Laura Alber stated that the company prioritized regular pricing to safeguard brand identity and margins. The strategy seemed effective as the gross margin expanded by 210 basis points quarter-over-quarter to 40.7%. This marked a reversal from the previous quarter when the gross margin had eroded by 260 basis points to 38.6%. Nevertheless, the experience of competitor RH (RH) demonstrated that avoiding price adjustments can come at a cost, with RH witnessing declining sales over several quarters. RH eventually decided to increase markdowns to clear out discontinued inventory. While WSM has chosen to stick with a full-price strategy for now, demand did suffer during this quarter, evidenced by the 11.9% decrease in comparable brand revenue. Notably, Pottery Barn experienced a 10.6% decline in comps, which is a notable shift from its previously strong performance. However, it's important to highlight that Pottery Barn had achieved an exceptionally high comparable growth of +21.5% in the same quarter of the previous year.

In contrast, the struggling West Elm banner faced a significant challenge, with a quarter-over-quarter comp of -20.8%. To counter the impact of declining sales, WSM maintained strict control over costs, particularly in areas such as advertising and employment expenses. In Q2, SG&A expenses were down by around 14% year-over-year to $486 million, allowing WSM to exceed earnings estimates.

Promisingly, the company expects to maintain strong operating margins despite lagging sales. Despite revising down its FY24 revenue growth guidance, WSM increased its operating margin outlook for the fiscal year, reflecting a positive outlook for 2H24. While WSM's Q2 results undoubtedly reflected a challenging business environment, they managed to exceed expectations on earnings, offering a sense of relief. What's particularly encouraging for the stock's performance is the prospect of improved margins in the latter part of 2024.

Advance Auto Parts (AAP) is experiencing relatively stable trading despite reporting a Q2 earnings miss today. The more significant development seems to be the appointment of a new CEO for AAP. The current CEO, Tom Greco, had previously announced his retirement plans, and Shane O'Kelly has been selected to take over as CEO, starting on September 11. Tom Greco has held the CEO position since April 2016. Shane O'Kelly most recently held the role of CEO at HD Supply, a wholly owned subsidiary of Home Depot (HD). Before joining Home Depot, O'Kelly served as the CEO of PetroChoice, the largest distributor of lubricants in the country. Additionally, AAP disclosed the departure of CFO Jeff Shepherd and is currently in the process of finding a replacement. AAP is also conducting a comprehensive operational and strategic review. Addressing the Q2 results, AAP notably missed earnings expectations but slightly surpassed revenue projections. The company reported a comparable sales decrease of -0.6%. AAP also substantially revised down its FY23 EPS guidance from a range of $6.00-6.50 to $4.50-5.10. This downward revision appears to signal a cautionary adjustment for the second half of the year, potentially in preparation for the incoming CEO's leadership.

Within the automotive part retail sector, there is a clear divergence in performance. AutoZone (AZO) and O'Reilly Automotive (ORLY) have demonstrated strong performance with rising stock prices over the past year. In contrast, AAP has struggled in comparison and needs to enhance its performance. The selection of an external candidate as the new CEO brings optimism for a fresh perspective to turn the company around. The fact that the incoming CEO has a background with Home Depot, which is well-regarded in the retail industry, could be appealing to investors.

Although the strategic review, new CEO, and potential new CFO are all positive steps, closing the gap with competitors AZO and ORLY is likely to be a challenging endeavor. Detailed turnaround plans from AAP will be anticipated, but exercising caution in the short term might be advisable. Notably, there's a suggestion that AAP might consider discontinuing its dividend, in contrast to AZO and ORLY, which don't offer dividends. Redirecting funds could potentially yield more beneficial results.

Toll Brothers (TOL) appears to be gaining ground despite a rising interest rate environment, which might be expected to negatively impact homebuilders due to increased mortgage costs. Surprisingly, TOL stands as an exception, as demonstrated by its robust Q3 earnings report, marking a streak of four consecutive quarters where the company has outperformed EPS and revenue projections. TOL's CEO, Douglas Yearley, notes that rising mortgage rates are strengthening a "lock-in effect" that has kept resale inventory at historically low levels. Essentially, homeowners with lower mortgage rates are reluctant to sell their homes since acquiring a new mortgage at higher rates would be less appealing. This situation intensifies the existing housing supply shortage, which stems from years of insufficient new home production. These housing market dynamics have led to a drop of 17% year over year in existing home sales in July, according to The National Association of Realtors. However, on the flip side, the demand for new homes is strong, prompting potential buyers to turn to homebuilders like TOL to bridge the housing inventory gap. This positive demand environment is well reflected in TOL's earnings report. Delivered homes have increased by 5% to 2,524 units, surpassing the company's projected range of 2,350-2,450 units. TOL has also raised its FY23 home deliveries outlook once again, anticipating 9,500-9,600 units compared to the previous guidance of 8,900-9,500 units.

Yet TOL's success isn't merely attributed to increased sales volume. The company is benefiting from higher home prices driven by the constrained inventory, while simultaneously enjoying lower construction costs compared to a year ago due to declining lumber prices. The average price per home in TOL's backlog has risen by 3.5% year over year to $1.08 million, and the adjusted home sales gross margin has expanded by 140 basis points year over year to 29.3%. As a result, TOL's EPS has surged by 59% year over year to $3.73.

Notably, since TOL releases its earnings slightly later than many competitors like D.R. Horton (DHI), Lennar (LEN), and KB Home (KBH), its results and outlook offer a more current indicator of the health of the homebuilding industry. Despite serving a relatively affluent customer base more capable of absorbing higher mortgage rates, TOL's consistently strong performance in surpassing expectations underscores a positive outlook for the entire homebuilding sector.

Abercrombie & Fitch (ANF) is experiencing a significant surge in its stock price today following its Q2 (Jul) earnings report. Contrary to modest profit expectations, the apparel retailer delivered remarkable results with EPS of $1.10, marking a significant turnaround from a loss of $(0.30) in the same period last year. Revenue also witnessed a robust rise of 16.2% year over year to $935.4 million, well surpassing the previously guided +4-6% range. Impressively, ANF's Q3 (Oct) revenue guidance and its full-year FY24 projections are also exceeding analyst anticipations. ANF's exceptional same-store comps of +13% are noteworthy, particularly driven by its flagship Abercrombie brand, which achieved substantial comps of +23%. The Hollister brand posted a decent +5% in comparison. Geographically, the Americas constitute a significant portion of Q2 sales at 78%, displaying strong comps of +14%. EMEA saw a weaker but satisfactory +6% in comps, whereas APAC experienced robust comps of +26%, though it accounts for only 3% of sales. Abercrombie, previously considered a laggard brand within ANF's portfolio, has undergone a remarkable transformation. The brand has achieved 10 consecutive quarters of growth, marking its highest Q2 sales performance since 2011. ANF attributes this resurgence to the brand's evolution from a jeans and T-shirt focus to a more diversified lifestyle brand, including pants and dresses. The men's business is also seeing healthy comps. The bottoms segment encompasses various styles from cargo pants to knit bottoms and wider-leg jeans. ANF notes that its global growth gained momentum throughout Q2, while customer response to its brands remains strong. Notably, Hollister has returned to growth after a period of transformation. Supply chain stability has allowed ANF to effectively respond to fashion trends and customer preferences, leading to a 30% year-over-year reduction in inventory. This approach helps keep inventory tight and minimizes markdowns.

Another impressive metric is the operating margin, rebounding significantly to 9.6% from (0.3)% year over year, showcasing the positive effects of higher sales and more streamlined inventories. This prompted ANF to raise its full-year guidance from 5-6% to 8-9% operating margin.

Abercrombie & Fitch has notched back-to-back impressive quarters, commendably revitalizing its Abercrombie brand and witnessing a potential comeback for Hollister. Such turnarounds are notable in the apparel industry, especially considering the consumer's restrained discretionary spending, a challenge that ANF has seemingly overcome.

Previous update:

Coty's (COTY) recent slide in stock value follows a slight earnings miss for Q4 (Jun), coupled with a conservative FY24 EPS outlook. The cosmetic manufacturer's shares have dipped over 15% since reaching mid-July highs, mirroring the broader retail sector and its peers, except for e.l.f. Beauty, which achieved new 52-week highs due to its lower-priced products' popularity. Adjusted EPS for Q4 swung from a loss of $(0.01) in the previous year to $0.01, but fell short of the $0.06 and $0.22 reported in Q3 (Mar) and Q2 (Dec) respectively. Coty's strategy of implementing price hikes has helped maintain operational profitability, with adjusted gross margins improving by 70 basis points YoY to 62.8%, despite elevated input costs. Coty revealed plans to continue these pricing actions into FY24, aiming for a mid-single-digit increase across much of its product lineup in Q1 (Sep). The company acknowledged that inflation would persist next year, testing its brand loyalty. Despite two years of price hikes, Coty expressed confidence in its ability to navigate such increases without significant backlash, combining the hikes with added value.

Coty's revenue grew 15.7% YoY to $1.35 billion, aligning with the upper end of its initial $1.20-1.40 billion forecast. This return to double-digit growth, reminiscent of 2021 and 2022, was driven by positive momentum in both the Prestige and Consumer Beauty segments, with like-for-like (LFL) revenue growth reaching 21% and 10% YoY, respectively. Coty noted the fragrance category's resilience within the Prestige segment despite macroeconomic pressures, and Consumer Beauty's benefit from strong demand across core brands, including CoverGirl. The quarter saw robust LFL growth across all geographies, with the Americas, EMEA, and Asia Pacific all increasing by at least 10%.

Looking forward, Coty's FY24 adjusted EPS guidance fell slightly short of analyst expectations, projecting a range of $0.44-0.47. Nevertheless, this outlook implies a solid 56.9% YoY increase at the midpoint, demonstrating Coty's confidence in offsetting persistent cost inflation with its pricing strategy. While Coty's Q4 performance was relatively moderate, leading to subdued price movement, the beauty category remains resilient, driven by ELF's recent success and Coty's steady figures for Q4. Coty's long-term focus revolves around targeting younger generations, particularly Gen X, whom management regards as loyal customers. Additionally, the company's entry into the Brazilian market, estimated as a $4.0 billion opportunity, underscores its strategic expansion efforts.

Fabrinet (FN) is experiencing significant positive momentum following the release of its Q4 (Jun) earnings report. The Thailand-based company, which provides optical and electronic manufacturing services to original equipment manufacturers (OEMs), exceeded analyst expectations by a considerable margin. Moreover, its Q1 (Sep) guidance midpoint outperformed projections. The company's strong performance in its artificial intelligence (AI) business is likely contributing to the stock's surge. Monitoring firms like Fabrinet is crucial for insights into the tech and electronics production sector. The company's focus on optical components, automotive parts, medical devices, industrial lasers, and sensors provides a lens into various aspects of this industry. In FY23, Fabrinet's four largest customers were Cisco, Lumentum, NVIDIA, and Infinera, contributing to 16%, 15%, 13%, and 12% of revenues, respectively. The past year presented challenges for Fabrinet, involving supply chain disruptions in the first half followed by inventory adjustments in the second half. Breaking down Q4 results by segment, Fabrinet's larger optical communications (OC) segment, constituting 77% of revenues, witnessed an 8% YoY revenue increase but remained flat sequentially at $502.1 million. Within OC, telecom revenue experienced a 17% YoY and 19% sequential decline to $309.6 million, mainly due to inventory adjustments at both Fabrinet's customers and their clients. However, this decrease was counterbalanced by record revenue growth in datacom, which surged by 107% YoY and 57% sequentially to $192.5 million. Notably, the substantial growth in datacom was largely attributed to an 800-gigabyte program catering to AI applications.

Looking ahead, Fabrinet anticipates the short-term inventory correction in the telecom sector to continue into Q1. Despite this, the strong datacom performance in Q4 is expected to largely offset the inventory-related challenges. The company maintains an optimistic outlook for its overall market position, including potential growth in AI-related programs. In its non-OC business, representing a smaller portion (23% of revenues), revenue increased by 25% YoY but decreased by 5% sequentially to $153.8 million. The automotive subsegment within the non-OC area exhibited notable growth, with auto revenue rising by 66% YoY to $92.9 million due to improved component availability. Industrial laser revenue was $28 million, down by 10% from Q3, while other non-OC revenues reached $32.9 million, marking a 10% YoY increase.

The substantial rise in Fabrinet's stock can be attributed to multiple factors. The company's positive headline figures, particularly the favorable guidance at the midpoint, have generated investor satisfaction. The record AI revenue is likely a significant driver behind the stock surge, capturing attention on a day when few other companies reported earnings. Fabrinet's AI success seems to be drawing parallels with the AI-driven success of NVIDIA, a substantial customer for FN. With NVIDIA reporting the following day, Fabrinet might be considered a potential secondary play in this context.

In a significant departure from its double-digit beat in the previous quarter, Dick's Sporting Goods (DKS) experienced a substantial miss in bottom-line estimates for Q2 (Jul), marking the first such occurrence since the COVID-related restrictions began in 2020. The sporting goods retailer also failed to meet analysts' sales projections and lowered its FY24 (Jan) EPS forecast by around 11% at the midpoint. However, the company maintained its FY24 same-store sales growth estimate at a range of flat to +2%. Simultaneously, DKS introduced a new business optimization strategy, involving the elimination of customer support roles and other positions, constituting about 1% of its workforce. Despite these measures, DKS did not anticipate substantial cost savings, as investments in talent were expected to offset the effects. The decline in adjusted EPS by 23% YoY to $2.82 was attributed by CEO Lauren Hobart to elevated inventory shrink, which encompasses the loss of inventory due to factors such as theft, administrative errors, or vendor fraud. This issue has been acknowledged by several prominent retailers recently, including Walmart, Target, and Home Depot. The relatively subdued discretionary spending environment contributed to modest sales growth of only 3.6% to $3.22 billion. Notably, DKS deals with a range of price points, but its products like sporting goods and camping gear often fall into the "big-ticket" category, which might be adversely affected by the current spending climate. Consequently, DKS revised its FY24 outlook downward, forecasting adjusted earnings within the range of $11.50 to $12.30, down from the previous estimate of $12.90 to $13.80. Despite the challenging circumstances, some positive aspects emerged from the quarter. DKS observed a 2.8% rise in transactions and continued to capture market share. The company's strategy of reformatting its stores seems to be progressing well, with the introduction of new House of Sport locations that offer enhanced in-store experiences. Around 75 to 100 House of Sport sites are expected to open by 2027. Additionally, sales gained momentum in July, boding well for the crucial back-to-school season in Q3 (Oct).

With DKS shares retracing all gains made this year and returning to late December 2022 levels, the outlook appears somewhat bleak. The immediate demand landscape does not appear favorable, particularly as DKS faces competition from e-commerce platforms that offer comparable prices along with the convenience of online shopping. This has prompted the company to emphasize enhancing the in-store experience, a move that seems appropriate given the nature of its products, which often benefit from trial before purchase. Nonetheless, unless a significant catalyst emerges, DKS may continue to experience selling pressure in the coming months.

Despite a sluggish environment for do-it-yourself (DIY) projects and a more than 9% drop in revenue – its largest decline in over five years – home improvement retailer Lowe's (LOW) still managed to slightly surpass Q2 earnings per share (EPS) estimates, showcasing its strong operational performance. Employing measures such as cost containment and share buybacks, LOW achieved an earnings upside even as it confronted challenges posed by the decline in revenue. Notably, LOW's reaffirmation of its FY24 revenue, comparable sales, and EPS guidance is of utmost significance, indicating that demand has stabilized and is not expected to deteriorate further.

Anticipations were subdued ahead of LOW's earnings release, evident in the stock's 8% decline since the end of July. Concerns that a slowdown in consumer discretionary spending could impact the company's results were exacerbated following its competitor Home Depot's (HD) Q2 earnings report last week. While HD managed to exceed expectations in both revenue and earnings, the DIY segment remained weak, particularly in sales of higher-ticket items such as appliances and grills.

As projected, LOW encountered challenges in its DIY business, which accounts for roughly 75% of total sales, in Q2, with decreasing lumber prices exacerbating the pressure. Despite this, the 1.6% decline in comparable sales was better than anticipated due to stronger performance in LOW's expanding Pro business. In comparison, HD experienced a 2.0% decline in comps during Q2.

A cautious approach to managing the business expenses has also played a significant role in LOW's earnings outperformance. In Q2, Selling, General, and Administrative costs decreased by around 8% year over year to $4.09 billion. Additionally, the company's share buyback initiative, which resulted in approximately 10.1 million shares repurchased during the quarter, contributed to bolstering EPS. Consequently, even with the company facing its most substantial year-over-year sales decline in many years, the EPS only contracted by 2%.

While Q2 proved to be another challenging quarter for LOW, given its substantial exposure to the DIY market, the company's results outperformed expectations. Investors are finding relief as LOW, following in the footsteps of HD, reaffirmed its FY24 outlook. This affirmation, coupled with the results, has triggered a relief rally following a difficult start to August.

Previous update:

Goldman Sachs (GS) is in the process of evaluating a potential sale of its investment advisory business named Personal Financial Management, following a challenging quarter marked by missed Q2 earnings expectations and a substantial drop in investment banking revenue. This proposed divestiture is part of GS's strategy to offload underperforming assets that have been adversely affecting its performance. The move aligns with previous actions, including the sale of personal loans from its Marcus unit and the search for buyers for its acquired Fintech company GreenSky, which faced setbacks due to decreased consumer spending amid rising interest rates and inflation. The decision to potentially divest Personal Financial Management comes after GS's acquisition of the company in 2019 as part of a plan to broaden its client base and revenue streams. Although the acquisition, amounting to $750 million, aimed to replicate the diversification strategy executed by other financial giants like Morgan Stanley (MS), GS's attempts have yet to yield similar positive results. As GS sheds non-core assets, it will likely intensify its focus on institutional and high net worth clients, leading to increased reliance on its investment banking and trading operations. The stock's recent decline of approximately 10% in August underscores investors' diminishing confidence in GS's short-term prospects. However, this weakness combined with a potential rebound in the IPO and M&A markets and improved earnings resulting from the asset shedding could set the stage for a turnaround in the stock's performance.

Palo Alto Networks (PANW) has seen a notable surge in its stock price following its Q4 (Jul) earnings report, which revealed an EPS beat and in-line revenue. Despite mixed guidance, with upside EPS but downside revenue projections for both Q1 (Oct) and FY24, the market's reaction suggests that investors are finding value in the details of the report. An unusual scheduling choice for the earnings release, setting it for a Friday after the close, led to speculation that PANW might have been attempting to downplay negative news. However, while the numbers didn't surpass expectations, they were better than anticipated given the scheduling decision. Notable highlights from the report include substantial margin expansion, attributed to a higher software mix and scale synergies, which contributed to strong EPS performance. Additionally, PANW demonstrated solid billings growth and acknowledged the increased scrutiny and postponement of deals within the industry, a challenge it has proactively addressed through strategic sales team adjustments. Although the intensified deal scrutiny and increased use of deferred payments have raised some concerns, PANW's overall performance in the quarter has been viewed positively, particularly in light of the cybersecurity sector's mixed earnings season. The market's reaction, driven partly by initial skepticism due to the unusual scheduling, reflects investors' recognition of the company's efforts to navigate challenges and capitalize on growth opportunities.

Acushnet (GOLF), the parent company of Titleist and FootJoy, has experienced a notable uptrend this year, with its shares appreciating by over 25%. The stock received an additional boost after Jefferies upgraded it from "Hold" to "Buy." Particularly when compared to competitors like Callaway and NIKE, which have faced YTD share price declines, Acushnet's positive performance stands out. Operating in a highly competitive sector, Acushnet's solid competitive edge is highlighted by its consistent results, even amid an environment marked by inflation. The success of the Titleist brand underscores Acushnet's competitive advantage. Titleist golf balls, fueled by the successful launch of the Pro V1, saw a 20% sales increase YoY in Q2. While Callaway experienced even more significant growth in Q1, with over 30% improvement in golf ball sales, it anticipates a slowdown in the latter half of the year. In contrast, Acushnet expects its positive momentum in golf ball sales to continue through H2 2023, despite supply chain limitations affecting the Pro V1 lineup's availability. This upbeat trajectory contributed to Acushnet's upgraded FY23 revenue guidance of $2.35-2.40 billion, a contrast to Callaway's reaffirmed reduced outlook. Acushnet's strength also extends to its club offerings. Despite economic conditions impacting discretionary spending, Q2 golf club sales surged by 16% YoY, surpassing Callaway's 7% dip in the same period. Acushnet's success is particularly evident in its putters and drivers, driving Q2 sales, while wedges and irons met expectations. However, the company's golf apparel subsidiary, FootJoy, faced challenges. FootJoy's sales dropped by 10% YoY in Q2, consistent with the broader footwear industry's slowdown. Acushnet revised its FY23 outlook for FootJoy due to elevated inventories and increased promotional activity. In contrast, Callaway offered limited insight into its apparel business's performance for H2 2023. Despite golfers' return to pre-COVID activities, the golf industry remains healthy due to shifting consumer preferences and sticky inflation, maintaining double-digit growth in Acushnet's club and ball sales. Acushnet's competitive advantage is underscored by its outperformance compared to key rivals, potentially leading to increased market share. Unlike Callaway, Acushnet's projected sustained momentum in Titleist golf balls for the rest of the year positions the company for further market share gains, solidifying its leadership position in the golf industry.

Previous update:

Applied Materials (AMAT) is currently experiencing a relief rally, as its stock price has risen by 3% today. This uptick follows the company's positive performance in the third quarter (July) and its optimistic guidance for the fourth quarter (October). The company, a major player in the semiconductor equipment industry, had been under pressure from significant selling recently, with its stock declining almost 10% this month. This decline was primarily attributed to a shift in investor sentiment triggered by a Fitch downgrade at the beginning of the month, rather than any internal issues within Applied Materials.

In the July quarter, Applied Materials reported relatively stable year-over-year adjusted earnings per share (EPS) of $1.90. However, its revenues of $6.42 billion represented a 1.5% year-over-year decline, marking the company's first quarterly drop since the fourth quarter of 2019. The segments related to foundry, logic, and flash memory (NAND), which collectively contribute about 80% of the company's sales, underperformed during the quarter, leading to negative top-line growth. Despite this, in the first half of the year, the company's revenues from DRAM (dynamic random-access memory) surpassed the combined revenues of its two closest competitors. Additionally, Applied Global Services (AGS) achieved record revenues of over $1.46 billion in the same quarter.

During a conference call, Applied Materials discussed two key factors influencing its current and future performance: AI (artificial intelligence) and ICAPS (IoT, Communication, Automotive, Power, and Sensor). The company's management expressed optimism about these themes, emphasizing how they are interconnected, as consumer devices, vehicles, and infrastructure increasingly rely on AI for greater intelligence. The company sees promising long-term effects from this trend.

Meanwhile, the semiconductor industry is undergoing a significant shift towards regionalization. Governments have recognized the risks of outsourcing chip production, particularly highlighted during the pandemic. Applied Materials anticipates that countries will aim to establish local capacity to ensure industry resilience across various sectors. As a result, governments are expected to provide substantial incentives over the next five years to support this shift.

Looking ahead, Applied Materials is enthusiastic about the next quarter, projecting adjusted EPS in the range of $1.82 to $2.18 and revenues ranging from $6.11 billion to $6.91 billion, both of which surpass estimates. Despite the current soft demand for chips, particularly in personal electronics, the market has driven Applied Materials' stock higher, factoring in expectations of a trough in wafer fabrication equipment spending. This sentiment aligns with statements made by Micron, Lam Research, and KLA Corp in recent months. Moreover, the excitement surrounding AI's potential impact continues to fuel optimism.

While today's response is relatively subdued compared to last month's market action, there are compelling reasons to maintain a positive outlook on Applied Materials' long-term prospects. The ongoing regionalization of chip production could serve as an under-discussed catalyst for substantial growth in the latter half of the decade. Furthermore, the increasing incorporation of chips in various applications, alongside advancements in AI and smart technologies, is expected to provide enduring support for the company's growth.

Ross Stores (ROST) is experiencing a substantial uptick, with its stock rising by 6% following the release of its Q2 (July) report last night. The company delivered impressive results, exceeding expectations for both earnings per share (EPS) and revenue. Notably, its comparable store sales (comps) performed significantly better than anticipated. Although Ross Stores typically provides conservative guidance, it has presented an optimistic outlook for the next two quarters, which carries significant implications. The positive surprise in EPS surpasses the gains witnessed in the past two quarters. However, the most noteworthy aspect is the EPS guidance for two specific reasons:

First, the in-line EPS guidance for Q3 (October) might appear unremarkable at a glance. However, for those closely tracking Ross Stores like us, the on-target guidance came as a pleasant surprise. The company traditionally sets low expectations in its guidance, only to exceed them upon reporting. This on-par guidance signals a higher level of confidence in its immediate performance. Moreover, the midpoint of the Q3 EPS projection exceeds analyst predictions, resembling a guidance increase, which is a rare occurrence and quite delightful.

Second, Ross Stores has not only provided guidance for one upcoming quarter but for two. While this move mirrors last year's approach when the company reported Q2 results in August 2022, this time, the Q4 (January) EPS guidance surpasses analyst forecasts. This demonstrates Ross Stores' assurance regarding the forthcoming holiday season.

The second quarter saw a strong +5% increase in same store comps, significantly outperforming the prior expectation of "relatively flat" performance. The rise in comps was primarily propelled by heightened customer foot traffic. Notably, the categories of cosmetics and accessories displayed robust growth, with home goods also achieving above-average results. The positive performance was spread across various geographical regions. Furthermore, Ross Stores has elevated its comp guidance for the latter half of 2023. Whereas the company initially anticipated flat comps for the entire year, it now foresees Q3 comps of +2-3% and Q4 comps of +1-2%.

Operating margin for Q2 remained consistent year-over-year at 11.3%, notably surpassing the earlier guidance range of 9.8-10.1%. The company benefited from reduced costs related to ocean and domestic freight. The operating margin projection for Q3 stands at 10.3-10.5%. Another encouraging metric is the 15% year-over-year decline in consolidated inventories. Many retailers faced an inventory glut in 2022 amidst consumer spending pullback, making this progress commendable.

In summation, Ross Stores' performance and guidance have left a favorable impression. Although TJX also reported favorable figures, there were concerns given that a significant portion of Ross Stores' merchandise falls within the discretionary spending category, which has witnessed a decline due to weakened consumer expenditure. Ross Stores predominantly specializes in apparel and home goods, areas that consumers might cut back on during tight financial situations. Moreover, the absence of grocery sales, which served as a boon for Walmart in recent quarters, distinguishes Ross Stores. Additionally, its core customer base consists of lower-income individuals who are most impacted by inflation. The surprise here is Ross Stores' ability to deliver these results, especially the robust +5% comps.

The surge in customer foot traffic suggests that Ross Stores might be attracting higher-income consumers aiming to save money, which is a positive development. Looking ahead, this report serves as a positive sign for other value and dollar store retailers scheduled to report soon, including Burlington (August 24), Big Lots (August 29), and Ollie's Bargain Outlet (August 31). Dollar stores such as Dollar Tree (August 24), Dollar General (August 31), and Five Below (August 30) are also on the horizon, and this report sets a promising tone for their upcoming announcements.

Deere's (DE) Q3 (July) report, featuring an earnings beat and upward guidance revision, has failed to yield positive stock gains as concerns over slowing sales growth and the potential impact of higher interest rates on long-term demand lead to a 4% decline in the stock (DE). This response mirrors the market's reaction following the solid Q2 (April) results in mid-May, where worries about future demand persisted despite strong performance. However, it's worth noting that the stock's decline after the April results was short-lived.

During the July quarter, Deere posted impressive earnings growth, with a remarkable 65.6% year-over-year increase to $10.20 per share. This marks the company's most significant earnings beat in over five years. Operating margins in Deere's core segments also surged, primarily due to favorable pricing. Despite experiencing over +20% growth in equipment sales for four consecutive quarters, growth tapered to a single-digit increase of 9.9%, reaching $14.28 billion. Anticipated revenue growth in the upcoming quarters is likely to be less exuberant as Deere faces the challenge of surpassing quarters with over +30% growth rates.

A potential concern for future growth lies in crop prices, as rising consumer costs intersect with Deere's strategy of gradually raising prices to counter inflationary pressures. Currently, this concern has not materialized; the Production & Precision Ag (43% of revenue) and Construction & Forestry (24%) segments enjoyed double-digit growth in sales due to higher price realization and shipment volumes, partially aided by weather-induced yield pressures that maintained elevated prices. Nonetheless, deflation in some commodities, as observed in sectors like Tyson Foods, could gain prominence in the upcoming quarters.

One minor setback in the July quarter was the modest 3% year-over-year increase in sales for the Small Ag & Turf segment (24% of revenue). Reduced shipment volumes in this category reflect a hesitation among smaller farm and business owners to accept higher prices. However, the subdued performance of Small Ag & Turf sales might have been anticipated given retailers like Tractor Supply and Home Depot reported sluggish demand for discretionary items. Tractor Supply even acknowledged more challenging conditions than initially expected in the midst of inflation concerns.

Deere remains optimistic about the second half of the year, projecting a net income range of $9.75 billion to $10.00 billion, up from the previous range of $9.25 billion to $9.50 billion. The company anticipates a year-over-year sales growth of +20% for its Production & Precision Ag business. Management emphasizes the stabilization of their supply chain, favorable market conditions, and an improving operating environment.

The key takeaway from the Q3 report is that impressive headline figures may not suffice when overall market sentiment is declining. Minor setbacks, such as lagging Small Ag sales, become more pronounced, particularly if macroeconomic conditions weaken and overshadow solid equipment sales growth. A similar pattern was observed in the previous quarter, and this trend could continue to exert selling pressure on Deere in the short term.

Nevertheless, Deere's focus on smart farming equipment offers promising prospects for steady margin expansion over the long run. The company's dominance in the farming equipment market remains strong. Additionally, as supply chain disruptions continue to alleviate, Deere is well-positioned for sustained growth.

Previous update:

Experiencing a series of setbacks, CVS Health (CVS) finds itself grappling with another blow as its stock plunges by 8%, marking its lowest point since November 2020. The reason for this decline stems from the news that Blue Shield of California, a prominent health insurance company catering to more than 4.0 million members, has opted to sever most ties with CVS. Instead, Blue Shield has chosen to collaborate with Cost Plus Drug, an enterprise associated with Mark Cuban, and Amazon Pharmacy. This development is significant not only due to the substantial loss of customers but also because of the potential wider implications it carries. This move by Blue Shield raises concerns that other health insurance providers, whether nonprofit or for-profit, might also distance themselves from CVS and other pharmacy benefit managers (PBMs) such as Express Scripts, causing significant disruption within the traditional PBM landscape.

For CVS, the termination of its contract with Blue Shield comes at an inopportune juncture. The company is already grappling with challenges related to the impending partial termination of its agreement with Centene (CNC) in 2024. CVS's troubles began when CNC decided to shift its business to Express Scripts late in 2022. This decision placed additional strain on CVS's already uncertain outlook for 2024, further compounded by the fact that CVS's Star Rating had been downgraded from 4.5 to 3.5 in October. This rating cut unnerved investors and initiated a significant downward trajectory for the company's shares. In response, CVS has outlined strategies to mitigate the financial impact of this lower rating, including diversifying its contracts and implementing operational initiatives. The company has even announced a sizable layoff of approximately 5,000 employees before its Q2 report. However, despite these efforts, CVS cautioned that these measures might not fully offset the gap resulting from the rating cut.

Adding to these challenges are CVS's ambitious merger and acquisition endeavors. The company recently finalized acquisitions of Signify Health and Oak Street Health for $8.0 billion and $10.6 billion respectively earlier this year, potentially exerting further pressure on its profitability. Moreover, CVS's medical benefit ratio saw a year-over-year increase of 350 basis points to 86.2%, indicating rising outpatient costs.

In essence, the loss of the contract with Blue Shield poses a worrisome scenario for CVS. With PBMs constituting a significant portion of CVS's total sales, accounting for approximately half, the company's future performance could be substantially impacted. Notably, CVS withdrew its adjusted EPS target of $10.00 for FY25 earlier this month, subsequently revising its FY24 target to a range of $8.50 to $8.70 from the previous $9.00 target. This adjustment translates to flat year-over-year growth. Management has signaled that it will provide further clarity on its longer-term earnings growth outlook in December, although prospects for substantial improvement in the aftermath of these recent developments appear uncertain.

Cisco Systems (CSCO) pleasantly surprised the market with an unexpectedly robust performance as it concluded FY23 on a highly positive note. The company delivered a notably substantial earnings per share (EPS) beat, which stood out as the largest such beat since the third quarter of 2020. This marked departure from Cisco's typically modest EPS beats was particularly noteworthy this quarter. Impressively, revenues also climbed by 16% year over year, reaching $15.20 billion, surpassing expectations. Looking forward, Cisco's guidance for the first quarter of FY24 exceeded analyst projections, and its outlook for the entire FY24 remains in line with expectations. Notably, Cisco highlighted that its sales for FY23 reached a significant milestone of $57 billion, representing an 11% increase from FY22. This growth rate in revenue is the highest Cisco has experienced in over a decade. The company emphasized that customer demand remained robust overall. Cisco's positive outlook is rooted in the strength of its backlog, annual recurring revenue (ARR), and remaining performance obligations (RPO), which contribute to solid visibility and predictability. Q4 marked a historic quarter for Cisco, as it achieved record-high figures for revenue, non-GAAP operating margin, EPS, and operating cash flow. Remarkably, Q4 saw over 30% sequential growth in total product orders, the second-highest such growth rate in two decades, with double-digit gains across all customer segments. Product revenue experienced a significant uptick of 20%, while service revenue grew by 4%. Geographically, revenue distribution showed the Americas experiencing a 21% increase, EMEA up by 10%, and APJC up by 7%. Notable areas of product revenue growth included Secure, Agile Networks (up 33%), Optimized Application Experiences (up 15%), and Internet for the Future (up 3%), although Collaboration saw a decline of 12%, and End-to-End Security remained flat.

A particularly noteworthy metric was the non-GAAP operating margin, which saw a significant improvement to 35.4% from last year's 32.4%, surpassing the upper end of the previously guided 34-35% range. Cisco attributed this progress to favorable pricing, a favorable product mix, and the benefits from actions taken in the previous fiscal year. These actions included productivity enhancements that led to reduced freight and logistics, component, and other costs. For the upcoming Q1, Cisco foresees a non-GAAP operating margin in the range of 34-35%.

Additionally, Cisco highlighted the resolution of its backlog, which led to corresponding market share gains. During the first quarter of the calendar year (Q1), Cisco achieved over a 3-percentage-point increase in market share year over year in its three largest networking markets: campus switching, wireless LAN, and SP routing. The company anticipates further market share gains in these segments when Q2 market share data becomes available.

In summary, Cisco's performance in this quarter has been remarkably strong, deviating from its usual pattern of conservative EPS beats and cautious guidance. The company's significant EPS beat and optimistic guidance for the coming quarter come as a departure from its recent challenges related to supply chain disruptions. The normalization of lead times has greatly contributed to Cisco's improved product shipments and overall results compared to the previous year.

Tapestry (TPR), the company that owns luxury clothing brands like Coach, Kate Spade, and Stuart Weitzman, experienced a rather subdued response from the market today, hovering around a relatively unchanged position. This comes after the company released its earnings report for the fourth quarter of its fiscal year (Jun), which fell short of consensus expectations, along with providing a cautious outlook for the fiscal year 2024 (Jun). Despite the recent acquisition of Capri Holdings (CPRI), a move that involved purchasing the parent company of brands like Versace and Jimmy Choo at a considerable premium, TPR's stock experienced a decline of about 17% over a span of five trading days. This decline was attributed not only to the substantial cost associated with the CPRI acquisition but also to TPR's decision to temporarily halt its share buyback program in order to finance the deal. Digging into the details of the JunQ results, TPR reported earnings of $0.95 per share, reflecting a noteworthy year-over-year improvement of 21.8%. However, this figure fell short of analysts' expectations. The company's gross margins also exhibited growth, expanding by 120 basis points compared to the previous year. This increase was driven by relatively successful price realization, as consumers displayed a willingness to accept higher price points, especially considering the luxury positioning of TPR's brands. On the revenue front, TPR's JunQ revenues totaled $1.62 billion, marking a slight 0.3% decline compared to the previous year, which was below the anticipated figures. Notably, TPR's North American market underperformed expectations, experiencing an 8% decline in sales—much worse than the company's projection of a mid-single-digit decrease. Given that two-thirds of TPR's total sales originate from North America, the weaker consumer environment in the region significantly impacted the company's overall revenue performance, overshadowing pockets of strength observed in other global regions. In China, TPR's second-largest market, the company achieved a 50% growth in revenue, consistent with its earlier forecasts. This growth was in line with the favorable numbers from the prior year, which had been affected by the COVID-19 pandemic. Meanwhile, sales in Japan and "Other Asia" regions increased by 12% and 7% respectively, indicating continued positive traction among local consumers. In contrast, TPR faced challenges in Europe, with revenues declining by 13% as the company compared to the previous year's impressive 50% gains.

An important factor influencing TPR's quarterly performance is travel demand. While the company observed a year-over-year improvement in sales to tourists, these figures remain below pre-pandemic levels, revealing a minor setback considering that travel-oriented companies like Airbnb and Expedia have reported demand surpassing pre-pandemic levels.

Looking ahead, TPR's guidance for the fiscal year 2024 (FY24) was less optimistic, with expectations set at earnings per share (EPS) of $4.10 to $4.15 and revenues nearing $6.9 billion. This guidance reflects the company's focus on maintaining margins rather than pursuing volume expansion, which explains the relatively modest revenue projection. However, the cautious EPS forecast came as a bit of a disappointment. TPR anticipates gross margins to expand during the year, primarily due to an easing of freight costs.

The performance of TPR in the JunQ did not provide significant optimism about the state of luxury apparel. Anticipatory signals were evident leading up to TPR's report, notably from Ralph Lauren (RL) last week, which highlighted ongoing challenges in North America as consumers continue to prioritize value-conscious spending. Furthermore, in late July, Louis Vuitton (LVMUY) reported that American consumers demonstrated notable softness in comparison to their Western counterparts during Q2. In conclusion, TPR's JunQ report did not offer a wealth of positive indicators for the future, and the implications of the CPRI acquisition could continue to influence the company's performance moving forward.

Walmart (WMT) is experiencing a slight decline in its stock price following the release of its Q2 (Jul) earnings report this morning. What particularly catches our attention is the stark contrast between Walmart's results and those of Target (TGT), which reported its results yesterday. While both companies achieved positive earnings per share (EPS) outcomes, Walmart surpassed expectations not only in terms of revenue but also in reporting positive comparable store sales (comps). The most notable disparity is that Walmart increased its full-year EPS guidance, while Target lowered its EPS guidance—a clear divergence in their trajectories. During Q2, Walmart's comparable store sales (excluding fuel) for Walmart US exhibited a robust growth of +6.4%. This performance stands in stark contrast to Target's comp decline of -5.4%. Although Walmart's comps saw a slight decline from Q1's +7.4%, Q4's +8.3%, and Q3's +8.2%, the context is crucial; investors appear satisfied, especially given that Walmart was competing against a formidable +6.5% comp from the previous year—a more challenging benchmark than Q1 comps faced. It's worth noting that this positive comp occurred despite the moderation of grocery inflation by over 400 basis points compared to Q1 levels. Walmart's US comps were unsurprisingly propelled by its grocery and health & wellness segments, while general merchandise sales experienced a mild decline. Notably, food remained a strength, and the company's call highlighted its "encouragement" by the performance of general merchandise comps, which exceeded internal expectations for the quarter. This tone was notably more positive than what was conveyed during the Q1 call. Additionally, eCommerce, pickup & delivery, and advertising demonstrated strong performance. Although Walmart no longer offers specific comp guidance, it did mention that back-to-school sales are ahead of the plan. Sam's Club also exhibited strong comparable store sales (excluding fuel) at +5.5%, although this was a dip from Q1's +7.0%, Q4's +12.2%, and Q3's +10.0%. Nevertheless, this performance is commendable given the challenging comparison with robust +9.5% comps from the previous year. Sam's Club's comps were led by food, consumables, healthcare, and positive overall unit growth.

Regarding its general outlook, Walmart noted a reasonable level of economic uncertainty for the rest of the year. Despite moderating inflation and stable employment levels, credit markets have tightened, energy prices have risen, and some customers will face the resumption of student loan payments in October. Given these factors, Walmart's decision to raise its full-year EPS guidance is particularly noteworthy.

In summary, while this report from Walmart is decent, the market response has been relatively subdued. Noteworthy aspects include the commendable comps performance, especially considering the challenging year-ago result and inflation moderation. It's evident that higher grocery prices provided a tailwind for comps in recent quarters, although this momentum is waning slightly. The comparative analysis with last quarter's comps performance might be contributing to investors' cautious stance. Additionally, Walmart's cautious macroeconomic outlook stands out.

A key distinction is that Walmart is significantly outperforming Target, and the differentiating factor can be summed up in one word: groceries. Approximately 59% of Walmart's US sales stem from groceries, while Target's Food & Beverage segment only accounts for 21% of its revenues. This substantial discrepancy explains much of the relative outperformance. In essence, Walmart's extensive exposure to the grocery sector is proving to be a significant advantage.

Previous update:

Despite beating earnings per share (EPS) estimates, Brinker International (EAT) is experiencing a decline in its stock price by 3.5% after releasing its Q4 (Jun) earnings results. Brinker, which operates restaurants like Chili's and Maggiano's, reported EPS that surpassed expectations while its revenue aligned with projections. The company also provided guidance for FY24 EPS and revenue that fell in line with expectations. While the same restaurant comparables (comps) showed decent growth, they were not as robust as the previous quarter. The Q4 comps stood at +6.6% (Chili's +6.3%; Maggiano's +9.1%), marking a decrease from +10.8% (Chili's +9.6%, Maggiano's +21.6%) in Q3 (Mar). For the entire FY23, comps were at +8.1% (Chili's +7.0%; Maggiano's +17.3%). The driving factors for the Q4 comps growth were higher menu prices and a favorable item mix. The slight disappointment in the comps is partly attributed to Brinker benefiting from higher menu prices and also facing relatively easier comps from the previous year, particularly at the Chili's unit. Brinker managed to increase its restaurant operating margin (non-GAAP) to 13.4% from 12.5% in the same period last year. Throughout FY23, the company underwent significant strategic shifts to enhance its core dining channel business and improve margins. This included reducing discounting, scaling back investment in virtual brands, simplifying operations, investing in labor to reduce manager turnover, and reintroducing national advertising after a three-year hiatus. These efforts yielded positive progress in the Q4 results.

Considering the prevailing macroeconomic challenges, the Q4 results are viewed as decent. However, the comps were somewhat underwhelming due to the easier comparison. The company's strategy to move away from aggressive promotions and adjust menu prices accordingly is seen as favorable, allowing for more appropriate pricing and premium options. It's noted that Brinker's stock has maintained a range of $34-42 throughout 2023, and while this report might not trigger a significant change, the stock's current position at the lower end of the range raises some concerns.

JD.com is experiencing a drop in its stock price by 2% despite reporting favorable Q2 results, underscoring the prevailing concerns surrounding China's economic situation. The China-based e-commerce giant, a competitor of Alibaba's online shopping platforms, has shown decent growth in both its top and bottom lines during the second quarter. However, JD.com has faced challenges throughout this year, leading to a nearly 40% decline in its share price. This contrasts with Alibaba, which has maintained a relatively steady performance in comparison. The ongoing downward trend of JD's stock is especially disappointing when compared to Alibaba's recent turnaround story. Investors' hesitance toward JD might stem from several factors. Alibaba's Q2 results presented a more optimistic narrative of recovery. Additionally, Alibaba has faced more significant setbacks due to Chinese government regulations, which have not impacted JD to the same extent. While JD was dealing with less favorable year-over-year figures in Q2, its metrics did not reach the level seen with Alibaba. Moreover, JD's EPS beat in Q2 was less significant than its Q1 performance, which contrasts with Alibaba's Q2 beat. There could also be excitement surrounding Alibaba's AI-related ventures, given its substantial cloud business.

Despite these challenges, JD did achieve notable highlights in Q2. It recorded accelerated revenue growth of 7.6% year-over-year, reaching RMB 287.93, a significant improvement from the +1.4% growth in the previous quarter. JD, like Alibaba, benefited from third-party growth, primarily driven by strong advertising demand. Consequently, third-party marketplace GMV growth saw an acceleration for the second consecutive time in Q2.

JD experienced a 3% rise in product revenue year-over-year, driven by a remarkable 11% sales growth in electronics and home appliances. This upturn was particularly encouraging considering a few quarters of dampened demand in these sectors. However, general merchandise revenues decreased by 9% year-over-year in Q2, primarily due to underperforming supermarkets, a contrast to the COVID-induced gains experienced previously.

Despite the overall 5% year-over-year growth in JD Retail revenues in Q2, profitability was affected due to challenging year-over-year comparisons and investments in user experience enhancements. This led to a 90 basis point year-over-year slip in Non-GAAP operating margins, landing at 3.0%.

JD did not provide specific guidance but did remark on the uncertain macroeconomic and industrial conditions. Despite these uncertainties, the company remains confident in China's long-term economic development. The main takeaway from JD's Q2 report is the relatively healthy spending, particularly in core electronics and home appliances products. Nevertheless, broader fears stemming from economic data in China overshadow JD's Q2 achievements, and its performance may continue to be challenged unless a substantial post-COVID turnaround occurs in the Chinese economy.

Target (TGT) is experiencing a positive trading response following the release of its Q2 (Jul) results. Despite exceeding earnings per share (EPS) expectations, the company has now fallen short of revenue estimates for two consecutive quarters. While there were concerns about the guidance provided by TGT, it guided Q3 (Oct) EPS below consensus. However, TGT's recent trend of issuing conservative EPS guidance seems to be better understood by investors, who are not penalizing the company for it. TGT also revised its full-year adjusted EPS guidance downwards to a range of $7.00-8.00 from the earlier range of $7.75-8.75.

After experiencing three consecutive significant EPS misses, Target has now managed three consecutive robust EPS beats. In the first half of 2022, the company had excessive inventory, which clashed with a reduction in consumer spending on non-essential items. This inventory excess led to EPS challenges last year. However, TGT reported that it started this fiscal year with a much improved inventory position. The Q2 ending inventory was 17% lower year-over-year, with discretionary categories experiencing a 25% decrease. This outcome reflects the company's cautious planning strategy and the benefits of an enhanced global supply chain.

The same store comparable sales showed a decline of -5.4% (in-store -4.3%; digital -10.5%) in Q2. Although slightly worse than the previous guidance of a low-single digit decline, TGT emphasized its expectation of a wide range of possibilities. While discretionary categories experienced declines, TGT saw continued growth in frequency businesses such as Essentials & Beauty and Food & Beverage. For Q3, TGT predicts comps within a broad range, centered around a mid-single digit decline.

Compared to the beginning of the quarter, comp trends in Q2 weakened in the latter part of May through June, followed by a substantial recovery in both traffic and comps in July. The inflation in essential categories like Food & Beverage is causing these segments to consume a larger portion of consumers' budgets. Moreover, consumers are allocating more funds towards services like leisure travel, entertainment, and dining out, which is impacting discretionary product sales. Reductions in pandemic-related stimulus are also playing a role.

Another key metric to observe is operating margin, which soared to 4.8% in Q2 from 1.2% the previous year. This was consistent with guidance that predicted a sequential decline from the 5.2% margin achieved in Q1. Margin improvement compared to the previous year resulted from factors such as reduced markdowns, lower freight costs, and price increases, partially offset by higher inventory shrink due to theft and organized retail crime.

The positive stock movement can be attributed to TGT's substantial EPS beat and its report that July comps were significantly better than those in June. Investors often appreciate strong quarter-end comps. Additionally, TGT's reports of a favorable start to the back-to-school season have likely contributed to the positive sentiment. Investors might also be factoring in the company's tendency to provide conservative guidance in recent quarters.

A comparison between Walmart (WMT) and Target's stock performance may raise questions. Walmart's trading at new highs while Target remains closer to its lows can be attributed to one word: groceries. Walmart's US operations noted that groceries accounted for 59% of FY22 revenues, whereas Target reported that Food & Beverage contributed only 21% of FY22 revenues. This stark difference indicates that TGT has higher exposure to discretionary items, an area where consumer spending is currently constrained. On the other hand, Walmart's significant exposure to groceries has contributed to its stronger performance.

TJX (TJX) is set to maximize its gains today after surpassing expectations in various aspects of its Q2 (Jul) performance. The off-price retailer, which owns well-known banners such as HomeGoods, Marshalls, Sierra, and Homesense, achieved beats in earnings, revenue, and same-store sales estimates. Furthermore, TJX significantly raised its FY24 (Jan) outlook. TJX achieved a 23.2% year-over-year growth in its bottom line, reporting earnings of $0.85 per share. This marked a comfortable surpassing of its projected range of $0.72-0.75, representing its most substantial beat since 1Q23 (Apr). The company's top line also demonstrated robust expansion, rising by 7.7% to reach $12.76 billion. Impressively, same-store sales exhibited remarkable growth, surging by +6%, a notable deviation from TJX's earlier prediction of +2-3%. The core Marmaxx segment notably stood out with an +8% comp growth. Management commented that improved traffic patterns had particularly boosted categories like accessories and apparel. Notably, after a series of quarters with declining comp growth at HomeGoods, TJX managed to steer the banner back into positive territory with a +4% comp growth in Q2. This outcome aligned with expectations that Q2 could witness the revival of positive comp growth at HomeGoods, which was further supported by the positive performance of home furnishings e-commerce leader Wayfair (W) earlier in the month. On a related note, HomeGoods' performance bodes well for upcoming earnings reports from home furnishings retailers such as La-Z-Boy (LZB) and Williams-Sonoma (WSM) next week. TJX's international comps remained positive, with TJX Canada up +1% and TJX International (Europe and Australia) up +3%. Similar to the U.S., increased traffic also contributed to growth in TJX's overseas markets. Following a downward revision of its FY24 outlook in the previous quarter, TJX took a different stance in Q2. The company now aims for FY24 EPS in the range of $3.66-3.72, a significant increase from the previous estimate of $3.39-3.48. Additionally, it anticipates comps of +3-4%, up from +2-3%. Despite July's retail sales data surpassing expectations, TJX is operating in a period marked by heightened consumer budget constraints. Apparel companies like PVH (PVH) and Under Armour (UAA), both of which have a presence in TJX locations, have indicated challenges in the retail environment. However, as an off-price retailer, TJX can navigate economic difficulties by acquiring excess inventory at favorable prices, thus enhancing its merchandise margins. This strategy is reflected in the impressive Q2 pre-tax profit margins, which surged by 120 basis points year-over-year to 10.4%, far exceeding TJX's projected range of 9.3-9.5%.

Overall, TJX's Q2 results highlight consumers' growing inclination towards value-seeking amid the prevailing inflationary environment. The off-price retail sector remains a promising space, particularly as inflationary trends, although moderating, continue to exert their influence. Lastly, TJX's positive performance serves as a promising sign for upcoming reports from its peers, including Ross Stores (ROST), Dollar Tree (DLTR), Burlington Stores (BURL), and Five Below (FIVE).

Previous update:

Cardinal Health (CAH) is experiencing a decline in its stock price after reporting its Q4 (Jun) results. Although the stock initially saw gains and set a new 52-week high, it retreated from these highs. The company, which distributes pharmaceuticals and medical supplies, did manage to beat expectations for both earnings per share (EPS) and revenue. However, the extent of the EPS beat was smaller than in recent quarters, marking a departure from its trend of achieving double-digit EPS beats over the last three quarters. The dominant segment for CAH is its Pharma segment, and this segment played a significant role in driving the positive results. In the June quarter, the segment's revenue surged by 15% to reach $49.7 billion, fueled by growth in brand and specialty pharmaceutical sales from existing customers. CAH reported strong demand across various pharmaceutical categories, including brand, specialty, consumer health, and generics, along with robust performance from its major customers. The Medical segment, on the other hand, saw stagnant year-over-year sales at $3.8 billion. While this isn't an impressive outcome, it does signify an improvement from the segment's decline of 5% year-over-year in the previous quarter (Q3 - Mar). The Medical segment's performance was affected by lower volumes and pricing in the Products and Distribution subcategory, although this was partially offset by growth in at-Home Solutions.

In its outlook for FY24, CAH anticipates a growth rate of 10-12% in Pharma segment revenue, a decrease from the 15% growth achieved in FY23. The company expects growth from its generics program, with volume expansion and consistent market dynamics playing a role. In terms of the Medical segment, CAH acknowledges the need for ongoing efforts to boost demand and enhance cost performance. For FY24, the company projects a return to growth, reaffirming its expectation of 3% revenue growth for the Medical segment. While this growth projection may seem modest, it follows a decline of 5% in FY23.

All in all, Cardinal Health delivered a reasonably solid quarter. The Pharma segment remains a standout performer, while FY23 posed challenges for the Medical segment. There is a positive note for the upcoming FY24 as progress is anticipated in the Medical segment. The dip in the share price today is likely a result of the combination of a smaller-than-expected EPS beat and the general weakness in the overall market.

Sea Limited (SE) is facing a setback, as its stock price has fallen sharply by 28%, nearing its lowest point in 2023. This drop comes after SE fell short of both earnings and sales expectations in Q2. The company, known for its operations in e-commerce, gaming, and digital payments, mainly in the Asia Pacific region (Indonesia, Thailand, Vietnam, etc.), decided to pivot back to a growth-focused strategy, disappointing investors who were hoping for sustained profitability. SE's management was confident that the company is now better positioned than in 2022 to emphasize growth. They pointed to factors such as a resilient local economy, ongoing efforts to control costs, and favorable trends in gaming. However, Q2 results disappointed, leading to concerns that the shift to growth might be premature. Despite maintaining positive earnings, which improved from $(1.03) per share in the same period last year to $0.54 in Q2, the figures still fell short of expectations. Moreover, revenue growth remained modest, rising by only 5.2% year-over-year to $3.1 billion. This continuation of single-digit growth over the last two quarters was below analysts' predictions. SE's Q2 results are notably weaker when compared to global e-commerce giants like Amazon (AMZN), MercadoLibre (MELI), and Coupang (CPNG), all of which reported robust Q2 figures. While SE's e-commerce platform, Shopee, saw a 10% sequential increase in gross orders and decent growth in Gross Merchandise Volume (GMV), contributing to a 20.6% surge in revenue to $2.1 billion, its Value-Added Services (VAS) revenue faced a decline of 6.6% sequentially. This decline was mainly attributed to SE's strategy of offering free shipping across more products as part of its renewed focus on growth. SE's Digital Entertainment segment, largely based on gaming revenue, continued to lag, experiencing a 41.2% year-over-year decline to $529.4 million. Bookings also dropped by 38.2%. On a positive note, the number of Quarterly Active Users (QAU) increased by 10.8% sequentially, suggesting potential stabilization. However, management remained cautious about interpreting these trends as indications of broader, long-term stabilization.

In contrast, Digital Financial Services remained a bright spot, with revenue growing by 53.4% year-over-year to $427.9 million, driven by SE's credit business. Given that many individuals in SE's markets lack access to banking services, SE's digital payment offerings continue to gain traction. Importantly, non-performing loans overdue by over 90 days remained at around 2% of SE's total gross loan receivables.

The recent sell-off in SE's stock was triggered by disappointment over two consecutive quarters of missing earnings estimates and delivering revenue growth that met or fell below expectations. Investors were not anticipating SE's shift back to growth mode, leading to this significant decline. While some positive aspects emerged from the quarter, such as resilient e-commerce trends and potential stabilization in the gaming division, macroeconomic challenges remain a significant concern. The inherent volatility in SE's core markets adds to these uncertainties. If SE successfully reignites growth, its stock could experience significant gains. However, another quarter of disappointing headline results may continue to put pressure on the stock.

Switzerland-based footwear company On Holding (ONON) is experiencing a significant decline in its stock price, dropping by 13% after its Q2 earnings report. Despite surpassing revenue expectations and raising its FY23 revenue guidance, the company's adjusted EPS fell short of analysts' predictions. On the positive side, its sales surged by 52.3% year-over-year to CHF 444.3 million, driven by a remarkable growth in the direct-to-consumer (DTC) channel, which saw a 54.7% year-over-year increase. This segment achieved a quarterly record with CHF 163.5 million in Q2 sales, surpassing even the strong results during the previous holiday season. Additionally, On reported record online traffic, up 75% year-over-year. The wholesale channel also performed well, rising by 51% year-over-year to CHF 280.8 million, supported by strong sell-out numbers and reorders from partners. On's success can be attributed to its innovation strategy, launching six new performance shoes in just 24 months, with four becoming major franchises. Notably, its Cloudmonsters, Cloudrunners, Cloudghosts, and Cloudsurfers are popular among runners. The Cloudboom Echo 3, designed for long-distance running and worn by top athletes, has also garnered attention. The company's expansion isn't limited to runners; its new kids' shoe line is seen as a potential significant growth area. However, the stock decline can be attributed to the missed adjusted EPS, which dropped from CHF 0.14 to CHF 0.04 year-over-year. Foreign exchange (FX) factors seem to have contributed to this shortfall, as the strength of the Swiss franc against other global currencies affected the company's performance. ONON also cited slightly elevated distribution expenses due to a warehouse automation project and temporary warehouse space requirements. The stock's decline may also be linked to the company's limited increase in FY23 revenue outlook to CHF 1.76 billion from CHF 1.74 billion. FX dynamics play a role here, as FX headwinds for 2H23 are anticipated to be higher, and FX rates were more favorable when the earlier guidance was given.

Despite the negative reaction to the EPS miss, the company's overall performance seems solid. Demand remains robust, sales are strong, adjusted EBITDA nearly doubled, and margins increased. The start of Q3 also appears promising. The impact of FX fluctuations is worth considering, and the stock's decline might be an overreaction. Given its rising popularity and success in the footwear market, On Holding remains noteworthy for investors, especially after the dust settles from this report.

Home Depot (HD) managed to recover from an initial negative market response, as its shares are now making gains based on its strong Q2 (July) results. The home improvement retailer reported favorable performance in both revenue and earnings, while also reiterating its fiscal year 2024 (January) targets. In addition, the company's Board authorized a new $15.0 billion share repurchase program, replacing the prior authorization announced in August 2022. Initially, investors showed a negative reaction due to concerns in certain segments. The Pro segment, accounting for approximately half of HD's total revenue, experienced negative sales growth, impacting the company's overall performance. Consumers seemed cautious about larger home improvement projects due to persistent inflation, affecting an important market segment for professionals. Nonetheless, the Pro segment still outperformed the DIY sales, showcasing positive comparable performance in various categories. Interestingly, this could be a prelude to rival Lowe's (LOW) upcoming Q2 earnings. HD also highlighted that Pro backlogs remain healthy, exceeding historical norms. Similar to the previous quarter, HD faced challenges such as falling lumber prices and adverse weather conditions, particularly on the West Coast. These factors contributed to a year-over-year 110 basis points contraction in operating margins to 15.4%. Unfavorable weather disrupted crucial selling seasons, including outdoor items like grills and patio furniture. Despite the softer economy and anticipated headwinds, HD managed to deliver solid results. The company's earnings per share contracted by only 7.9% year-over-year, surpassing analysts' expectations. Revenue experienced a minor decline of 2.0% to reach $42.92 billion. Comparable sales decreased by 2%, aligning with HD's FY24 guidance forecast of a 2-5% decline. HD maintained its FY24 guidance, expecting a 7-13% decline in earnings per share and a 2-5% decrease in revenue year-over-year. While the immediate future remains uncertain, the company's management remains optimistic about the medium-to-long-term outlook for the home improvement industry. In conclusion, Home Depot faced challenges in Q2, including consumer preferences for smaller projects and external factors affecting seasonal products. Larger home improvement projects seem to be deferred due to the ongoing inflationary environment, which could continue impacting HD's Pro business. Elevated interest rates are also likely to impact the supply of used homes, influencing repair demand. Despite these hurdles, there were positive signs from Q2, particularly regarding a potential recovery in the Pro segment.

Previous update:

Tesla (TSLA) is facing a setback today as it reportedly reduces prices in China, leading to a 1% decline in its stock value. The company has lowered the prices of its Long Range and Performance Model Y by approximately $1,900, along with extending an insurance subsidy for the base Model 3 until the end of September. These price cuts are seen as a response to the sluggish recovery efforts in the Chinese market. This isn't the first instance of Tesla adjusting its pricing strategy in China. In the previous month, the company decreased the prices of its Model S and X vehicles by roughly $4,825, following a decision made a month earlier to offer cash subsidies to specific Model 3 purchasers. Throughout 2022, Tesla had consistently been reducing prices, which raised concerns among investors due to the growing competitive pressures in the Chinese market. Tesla's latest price adjustments mirror the actions of other electric vehicle (EV) manufacturers based in China. Li Auto, for instance, reduced its average selling price during Q2 to stimulate more robust delivery growth. Nio also lowered prices by over $4,000, despite actively avoiding a price war in June. XPeng, set to reveal its Q2 results soon, had previously reduced prices for its base models earlier this year to better contend with a challenging demand environment. The ongoing price competition among EV makers in China poses challenges not only for Tesla but also for its competitors. This situation compounds Tesla's existing concerns regarding the price cuts it implemented across various markets, including the U.S. and Europe, and the adverse impact on its profit margins. In the previous month, Tesla's stock suffered a 10% drop following a disappointing Q2 report, which highlighted a significant year-over-year decline in GAAP gross margins, falling over 680 basis points to 18.2%. The market had likely expected more stability in margins before the Q2 results were released. Despite this substantial contraction, CEO Elon Musk signaled that margin pressure is likely to persist in the near term. Although Tesla doesn't provide a breakdown of its deliveries by region, it's unclear to what extent the price cuts in China contributed to the company's record delivery figures in Q2. However, given the increased deliveries experienced by its Chinese rivals like XPEV and BYD, as well as other global OEMs such as Volkswagen Group, during Q2, these price cuts likely significantly boosted Tesla's Q2 delivery numbers. Considering Musk's recent statements about prioritizing volume over margin, the trend of price cuts is expected to continue as long as global economic conditions remain relatively weak, ensuring positive delivery reports. Furthermore, Musk indicated during the Q2 earnings call that the company is responsive to public sentiment. While the price war rages on in China, Tesla faces challenges in stabilizing its profit margins. While the decline in commodity costs like nickel, cobalt, and graphite can have a positive impact on vehicle costs, Tesla's shares might struggle to rebound until prices, and subsequently margins, find a more stable footing after the Q2 earnings.

There was significant merger and acquisition (M&A) news in the steel sector recently as Cleveland-Cliffs (CLF) made a bid to acquire US Steel (X), causing a notable market reaction. Cleveland-Cliffs' proposal involved a combination of cash and stock, offering $17.50 in cash plus 1.023 shares of CLF for each US Steel share. This proposed deal amounted to a total consideration of $35 per share, indicating a substantial 43% premium over US Steel's closing price on the preceding Friday. However, US Steel declined the offer, explaining that it required additional time to thoroughly assess the value of Cleveland-Cliffs. Almost half of the offer comprised CLF shares, prompting US Steel to request a non-disclosure agreement (NDA) to delve into Cleveland-Cliffs' financials and conduct due diligence to determine the feasibility of the deal. US Steel stated that CLF declined to finalize the NDA unless the economic terms of the proposal were agreed upon beforehand. Despite rejecting the offer, US Steel didn't entirely dismiss the possibility of a collaboration with Cleveland-Cliffs. Instead, it extended an invitation to CLF to participate in US Steel's ongoing strategic review process. US Steel had already disclosed its initiation of a formal review, aided by external financial and legal advisors, to evaluate strategic alternatives after receiving multiple unsolicited proposals, encompassing potential acquisition of specific production assets to considerations for the entire company. Cleveland-Cliffs has demonstrated significant M&A activity in recent years, acquiring AK Steel in March 2020 for $1.1 billion and ArcelorMittal USA in December 2020 for $1.4 billion. These acquisitions positioned CLF as the leading flat-rolled steel producer and iron ore pellet producer in North America, with notable exposure to the automotive sector. A potential deal with US Steel holds considerable significance, given its $6.4 billion market capitalization, surpassing the combined size of the AK Steel and ArcelorMittal USA transactions. Such a deal would be transformative for Cleveland-Cliffs, which boasts a $7.5 billion market cap. The steel industry operates through two primary methods: integrated producers (like CLF and X) manufacture steel from raw materials through blast furnaces, while mini-mills (such as CMC, NUE, STLD) use electric arc furnaces to melt scrap for steel production. Mini-mills are generally more flexible due to their ability to adapt to demand fluctuations and often employ non-union labor. Cleveland-Cliffs appears to be consolidating its presence in the integrated producer side through its recent M&A actions.

The developments in the steel sector are poised to attract attention, particularly considering US Steel's cautious approach to due diligence due to the substantial equity component of Cleveland-Cliffs' proposal. Additionally, the underperformance of CLF shares since March has factored into the situation. Although US Steel rejected the current offer, its openness to potential deals, whether with Cleveland-Cliffs or another prospective suitor, has contributed to the positive movement in US Steel's stock. Future negotiations may focus on adjusting the balance between cash and equity in potential proposals.

Monday.com (MNDY) has displayed robust performance, delivering a substantial beat-and-raise outcome for Q2 despite challenging economic conditions. Despite a soft-demand environment with reduced spending by IT departments, the work management platform has achieved positive results. This achievement is notable as other companies, such as ZoomInfo (ZI), have recently revised their sales outlook downward due to weak demand, emphasizing a shift toward profitability over growth, particularly in the software sector. This revision, along with a Fitch downgrade, led to a 12% decline in MNDY's stock by the end of the previous week. The positive response from the market is due to MNDY's ability to navigate these lighter demand conditions during Q2, sustaining the positive momentum it gained in Q1. Earnings per share (EPS) moved from negative territory in the same period last year to $0.41 per share, highlighting MNDY's swift pivot towards profitability. This shift aligns with MNDY's earlier announcement of achieving non-GAAP operating profitability ahead of schedule, which remains on track for this year. Despite a slowdown compared to Q1, sales growth remained strong, rising by 42% year over year to $175.7 million. The number of MNDY's customers with annualized recurring revenue (ARR) exceeding $50,000 increased by 63% year over year, following a 75% increase in Q1. Net dollar retention (NDR), which gauges existing customer spending, stood at just over 110% for the quarter, a slight dip from over 115% in Q1. MNDY acknowledges that NDR might face some pressure due to ongoing macroeconomic challenges in FY23. However, with the release of mondayDB 1.0 earlier this year, followed by planned iterations in the latter half of FY23 and versions 2.0 and 3.0 scheduled for 2024 and 2025, respectively, MNDY anticipates NDR to remain above 100%, even in the face of economic hurdles. Additionally, MNDY's CRM product continues to surpass expectations, attracting a healthy flow of customers. After Q2's strong performance and steady demand resembling the previous quarter, MNDY confidently revised its FY23 revenue guidance upwards to $713-717 million, from the earlier range of $702-706 million. While longer sales cycles and increased deal scrutiny remain concerns, MNDY observes robust demand from new customers and stabilizing NDR. Considering Q2's report, some metrics decelerated compared to the previous quarter, potentially reflecting an ongoing challenging macroeconomic climate. Nevertheless, the overall positive aspects of MNDY's Q2 results outweigh the negatives, particularly given the current economic conditions. The necessity of its product suite is evident even as spending patterns relax, highlighting its importance for sales teams during periods of slowed growth. Lastly, MNDY's Q2 figures provide an encouraging outlook in anticipation of upcoming July quarter reports from competitors like Salesforce (CRM) on August 30, Asana (ASAN) on September 5, and Smartsheet (SMAR) on September 7.