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- 👉 Week in Review: 11/19/23
👉 Week in Review: 11/19/23
Walmart's warning to America...
Happy Sunday.
Before we dive in, a special announcement!
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We had the special opportunity to attend the NYSE Opening Ceremony as well as interview Rachel at the BlackRock HQ afterwards! We look forward to sharing this content with the Rich Habits / Rate of Return audience soon!
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Week in Review — Too Long, Didn’t Read:
Walmart reports a rare EBIT miss, Target’s beauty business is booming, OnCloud’s gross profit margins hit all-time-highs, 30 million people are traveling for Thanksgiving, foreign Treasury holdings decline, Core CPI cools, and retail sales fall.
Key Earnings Announcements:
Walmart reports a rare EBIT miss, Target’s beauty business is booming, and On Cloud’s gross profit margins hit all-time-highs.
Walmart (WMT)
Key Metrics
Revenue: $159.4 billion, an increase of +5.3% YoY
Operating Income: $6.2 billion, an increase of +130% YoY
Profits: $453.0 million, compared to -$1.8 billion last year
Earnings Call Quote
“We’re not immune to the vagaries of the economy. Our customers are showing ongoing discretion in making trade-offs to be able to afford the things they need. We’ve recently experienced a higher degree of variability — including softening in the back-half of October.
This gives us reason to think more cautiously about the consumer versus 90 days ago.”
My Takeaway
Walmart stock has been trading at all-time-highs in anticipation for this quarter’s earnings — a lot to be excited about. However, management reported unexpected weakness during the last two weeks of the quarter — spooking investors. Walmart’s US earnings before interest and taxes (EBIT) also posted an uncharacteristic miss.
As you all might remember, Walmart’s “margin turnaround story” has been the talk of the town. During the pandemic, the company couldn’t figure out inventory, inflation was eating into their operating margins — the company needed operational optimization.
Bullish investors believe the margin turnaround story remains intact, and this quarter was a fluke. They’re compelled by supply-chain automation, marketplace acceleration (sellers increased +20% YoY and 55% utilize Walmart’s fulfillment services), as well as global advertising growth (+20% YoY).
On the other hand, bearish individuals cite the US EBIT miss as “the new normal,” grocery and general merchandise deflation causing softer same-store sales next year — potentially resulting in a poor 2024 for the company.
Personally, I’m not a shareholder. I believe there are better opportunities elsewhere in the market.
Target (TGT)
Key Metrics
Revenue: $25.0 billion, compared to $26.1 billion last year
Operating Income: $1.3 billion, an increase of +29% YoY
Profits: $971.0 million, an increase of +36% YoY
Earnings Release Callout
“In the third quarter, our team continued to successfully navigate our business through a very challenging external environment. While third quarter sales were consistent with our expectations, earnings per share came in far ahead of our forecast. This profit performance benefited from our team's commitment to efficiency and disciplined inventory management, and I'd like to thank them for their tireless efforts. Looking ahead, we're continuing to make investments throughout our business to provide the newness, affordability and convenience our guests want during the holiday season and beyond."
My Takeaway
The story last quarter was “shrinkage,” which is industry talk for “theft.” This quarter, the amount of theft that took place slowed materially — increasing the company’s gross profit margins, allowing them to beat their profit expectations.
However, YoY comp weakness continued as their discretionary category experienced its 7th consecutive quarterly decline. Specifically, apparel, home, and hardlines all declined by single-high-digits to low-teens. With that being said, beauty remains a resilient category for the company — delivering high-single digit growth.
Looking forward, if Target is able to optimize their cautious stance on inventory (while still leaning into “newness” and improving in-stock levels) — their gross margins will likely continue to expand. Freight, theft, and other efficiency opportunities also support further profitability upside in 2024.
I’m not a shareholder, as I believe there are better opportunities in the market.
On Holding (ONON)
Key Metrics
Revenue: $542.2 million, an increase of +58% YoY
Operating Income: $57.8 million, an increase of +44% YoY
Profits: $58.7 million, an increase of +185% YoY
Earnings Release Callout
“The third quarter has not only been the seventh consecutive record top-line quarter, but also our most successful quarter in history across numerous measures. The brand momentum for On’s footwear, apparel and accessories continues to convert into high sales growth across all channels. We are planning to add less additional wholesale doors in the future and to focus on our existing wholesale partners and our own DTC channels, E-com and own retail.”
My Takeaway
The incredible growth this quarter was led by a +55% increase in direct-to-consumer sales, reaffirming brand vitality and momentum to their consumers. The company saw strong consumer responses to product innovations, as well as high-profile sporting-event visibility (Hellen Obiri).
Their wholesale growth is beginning to moderate as door expansion slows. During the quarter the company reported +45% growth in wholesale growth, but management told us looking forward this is likely to begin to moderate to high-single-digits. With that being said, management mentioned their bullishness to expand their relationships both Foot Locker and Dick’s Sporting Goods in 2024.
On Holdings also saw strong gross margin trends during the quarter — as their gross margin expanded by +2.7% to 59.9%. Management notes ongoing benefits from freight, channel mix, and full-price sell-throughs.
I’m a happy shareholder, and will continue to expand my position as my portfolio grows in size. Demand for the product is extremely strong, gross margins are trending in the right direction, inventory growth is normalizing, and Q4 guidance looks conservative to me.
Investor Events / Global Affairs:
You may want to get to the airport early, and foreign Treasury holdings continue to be under the magnifying glass.
Airlines Expect Record Thanksgiving Flight
Airlines are gearing up for a record-breaking Thanksgiving travel season — with the Transportation Security Administration (TSA) expecting to screen 30 million passengers from November 17-28.
Foreign Treasury Debt Holdings Breakdown
Foreign buyers — who always play a massive role in supporting the U.S. Treasury market — now have a reduced (but still large) stake in U.S. government debt.
Overseas private investors and central banks hold ~30% of outstanding U.S. government debt — down from ~43% a decade ago.
The Federal Reserve's ongoing reduction of its portfolio — coupled with increased U.S. Treasury issuance amounting to a net of $2 trillion this year — has created a shift in the market's supply and demand dynamics.
Overseas investors sold a net $2.4 billion in long-term Treasuries in September — bringing their holdings to $6.5 trillion.
On a rolling 12-month basis, which helps to smooth out volatility in monthly data, the pace of foreign buying has eased to around $300 billion in recent months from levels above $400 billion for much of last year
“For some overseas investors such as David Coombs, head of multi-asset investments at U.K. investment manager Rathbones, U.S. government bonds remain an investment too good to pass up.
Coombs has been buying U.S. Treasurys lately for the first time in 15 years, drawn in by the rise in yields and the chance to compound those returns with exposure to the dollar. Treasurys now make up 9% of his portfolio, even larger than his holding of U.K. bonds and nearly half of his total fixed-income assets.
“In the U.S. it might look a bit bleak, but from our perspective over here, you look in a much better shape than we are… You’ve got some real value at these levels.””
— WSJ
Major Economic Events:
Core CPI cools, Retail Sales fall negative for the first since March.
Inflation Cools, Market Flies
In October, the Core CPI (which excludes food and energy costs) rose only +0.2% from September.
Despite some recent inflation bumps — the overall trend has eased significantly from last year's 40-year high, prompting discussions about the possibility of the Fed concluding its rate-hike cycle.
Chair Jerome Powell has repeatedly stressed the central bank could hike again if needed.
“October’s surprisingly soft core CPI reading will boost Fed officials’ confidence that rates are sufficiently restrictive. Still, core CPI readings will need to continue on this path for several more months for the FOMC to declare a definitive end to the rate-hike cycle.”
Retail Sales Fall, Still Slightly Beat Expectations
In October, U.S. retail sales declined by -0.1% MoM — marking the first drop since March and signaling a cooling economy.
Even excluding auto dealerships and gas stations, sales only rose by +0.1% (down from the prior six months' average gain of 0.6%).
Forecasters expect overall economic growth to ease in the final months of the year. Economists at S&P Global Market Intelligence estimated Wednesday that the economy will slow to a +1% growth rate in the fourth quarter.
“Consumers are feeling the weight of multiple economic pressures and discretionary retail has borne the brunt of this weight…
Consumers are facing newly emerging headwinds, including higher interest rates and the return of student-loan payments.”
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Disclaimer: This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
This is not financial advice or recommendation for any investment. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. I am not a BlackRock client or iShares ETF investor, but I have an incentive to endorse BlackRock because I was invited to attend iShares influencer events and received their branded swag.
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