Looking Ahead - December 12, 2016
Oil prices have surged since OPEC announced a production cut agreement on November 30. The cooperation of non-OPEC countries was an important component of that agreement and a key driver of the surge in oil prices that followed it. That is why there will be a good bit of attention paid to this weekend's ministerial meeting of OPEC and non-OPEC producers.
United Continental [UAL] Flies Investor-Friendly Skies with Q4 PRASM Update
Airline stocks have been a major beneficiary of the pro-growth rally that has moved the stock market since Election Day. United Continental (UAL 74.74, +2.00, +2.7%) for its part gained 23% from its close on November 8 to its close yesterday. Today, though, the stock continues to test a higher altitude, taking flight on the company's encouraging fourth quarter guidance.
With respect to the guidance, keep in mind that investors are looking at it from a relative standpoint more so than they are looking at it from an absolute standpoint -- at least in the case of the company's consolidated passenger unit revenue (PRASM) expectations.
Bolstered by stronger than expected bookings during the second half of the quarter, UAL now expects its fourth quarter PRASM to decline 3.0% to 4.0% versus its prior guidance, which called for a decline of 4.0% to 6.0%.
That was the first bit of good news.
The second bit of good news flowed out of the news heard earlier this week that UAL technicians and related employees ratified a new contract on December 5. That new contract is going to raise UAL's fourth quarter 2016 consolidated unit cost per available seat mile (CASM), excluding fuel, profit sharing and third-party expenses, by approximately 0.5 points. Even so, UAL anticipates its CASM, excluding fuel, profit sharing and third-party expenses, will increase 4.0% to 5.0% versus last year, which is better than what UAL had been anticipating.
The third bit of good news was wrapped up in UAL's assertion that its fourth quarter pre-tax margin is now expected to be between 7.5% and 8.5% versus its prior guidance of 5.0% to 7.0%.
The recent move in UAL has certainly made a lot of shareholders happy, one of which is Berkshire Hathaway (BRK.B 163.99, -0.12, -0.1%), which reported a new position of approximately 4.53 million shares in a 13F filing on November 14.
Including today's gain, UAL is up 30% in 2016, which is in-line with the NYSE Arca Airline Index (XAL 112.88, +1.24, +1.1%).
Stillwater Mining [SWC] bought for $18/share by South African Sibanye Gold [SBGL]
This morning, shares of platinum group metals miner Stillwater Mining (SWC 27.46, +2.78) trade about +18.9% higher in reaction to a buyout offer by Sibanye Gold (SBGL 7.16, -1.20 -14.3%) for $18.00 per share in cash.
For a bit of background, SWC is mainly a miner of Palladium and Platinum. Other minerals mined by SWC include Rhodium with Nickel, Gold, Silver and Copper mined to a lesser degree. For context, in the fiscal period ended December 31, 2015, SWC reported total revenues -23% versus 2014 to about $726.3 million. South African-based SBGL reported first half earnings of $0.36 per share on operating profits which were up 128% to R5.4 billion (US$351 million). SBGL, mainly a gold miner, also produces uranium ore and platinum.
In terms of today's deal, it was announced that SBGL would buy SWC for $2.2 billion or about $18.00 per share in an agreement that's expected to close in Q2 of 2017. Further, it was disclosed that more than 20 parties were contacted in relation to the review of SWC's strategic opportunities, and its Board of Directors came to an agreement that after speaking with these parties, it would unanimously approve the transaction.
SBGL has secured bridge financing of $2.7 billion provided by Citi and HSBC to fund the transaction consideration and repay certain existing indebtedness of SWC.
SWC is required to pay a break-up fee of $16.5 million and reimburse SBGL for up to $10 million of expenses in the event the merger agreement is terminated in certain circumstances, including if SWC's Board of Directors changes its recommendation in favor of the transaction and in certain other events. SBGL is required to pay a reverse break-up fee of $33 million and reimburse SWC for up to $10 million of expenses in the event the merger agreement is terminated in certain circumstances, including the failure to obtain SBGL shareholder or certain other approvals.
Shares of SBGL closed lower by more than 15% today in South Africa with its US listed ADR faring slightly better thus far.
Duluth Holdings [DLTH] trades sharply lower on OctQ earnings; warm weather hurt
Duluth Holdings (DLTH), which operates under the name Duluth Trading Company, is trading sharply lower today (-22%) after reporting Q3 (Oct) earnings last night. Duluth Holdings is a recent IPO, having made its debut in November 2015.
In terms of quick background, Duluth Trading is a rapidly growing lifestyle brand of men's and women's casual wear, workwear and accessories sold exclusively through its own channels. You may have seen the commercials where the portly man is in a vice grip around his waist, but starts dancing once he puts on his very comfortable Duluth Trading "Buck Naked Underwear" using the tag line: Feels Like Wearing Nothing At All. Other commercials include the elongated t-shirts with the tag line: Plumber's Butt Fixed.
DLTH's durable and functional products include its Longtail T shirts, Buck Naked underwear and Fire Hose work pants. The brand has a heritage in workwear that transcends tradesmen and appeals to a broad demographic of men and women for everyday and on-the-job use. Approximately 88% of sales consists of proprietary products sold under its Duluth Trading brand name. Its brand is defined by: products manufactured with high quality craftsmanship, humorous and distinctive marketing and an outstanding customer experience.
To protect the integrity of the Duluth Trading brand, the company offers its products exclusively through its own distribution network: its website, catalogs and its small handful of brick-and-mortar retail stores (DLTH has just 12 retail stores plus two outlet stores). This distribution strategy eliminates the need to sell through third-party retailers, allowing DLTH to control prices and focus on its core competencies of product innovation. The company has created strong brand awareness, built a loyal customer base and has generated robust sales momentum.
Turning to the OctQ earnings results, EPS fell to $0.01 from $0.06 in the prior year period. However, a small loss was expected by the market so it was good to see a small profit. Revenue rose 21.2% year/year to $67.0 mln, which was light of market expectations. In terms of guidance, DLTH lowered it full year EPS guidance to $0.52-0.60 and revenue guidance to $360-370 mln. That's down from prior guidance of $0.66-0.70 for EPS and $370-380 mln for revenue.
DLTH concedes that OctQ sales fell short of expectations. In the latter part of September and through the quarter end in October, DLTH experienced unusually warm weather that extended across the country and this had an impact on total sales. This unseasonable weather, coupled with a highly promotional environment, continued into November (early part of JanQ). That's why DLTH lowered full year guidance.
During OctQ, the company opened three new retail stores, two in the Chicago metro market and one in King of Prussia, PA. DLTH now has a total of 12 retail stores and two outlet stores. So far in FY16, DLTH has opened seven new stores, exceeding its original expectation of 3-5 new stores this year. Retail expansion is one of the key drivers of DLTH's growth strategy and this year the chain has expanded its retail presence into large metro markets. Also, DLTH has established a foothold in the Eastern US market where there is a sizable concentration of Duluth customers.
In sum, the stock is trading sharply lower as it appears investors may not have been aware of just how much of a negative impact the warm fall weather would have on DLTH. And the concern is that the weakness extended in early JanQ. However, DLTH may be worth a look once the stock settles down as December has been very cold and the forecasters are expecting a brutal winter for much of the US. That's good news for DLTH.
Restoration Hardware [RH] in Need of Restoration after Dour Fourth Quarter Outlook
Restoration Hardware (RH 31.55, -7.44, -19.0%), which caters to the luxury lifestyle market with its home furnishings and accessories, reported its third quarter results after Thursday's close. There are several items that aren't sitting well with investors, the most notable of which is the company's dour fourth quarter guidance.
Before getting to the fourth quarter, let's take a brief look at the third quarter.
The retailer's net revenues increased 3% to $549.3 million, its comparable brand revenue declined 6% versus a 7% increase last year, and its adjusted diluted earnings per share (EPS) of $0.20 were down sharply on a comparable basis from $0.65 last year.
The revenue and EPS results were actually above the company's guidance and analysts' average expectations. That was small consolation, though, when pitted against the disappointing guidance for the fourth quarter.
Looking to the fourth quarter, Restoration Hardware is projecting net revenues in the range of $562 million to $592 million and adjusted diluted EPS to be between $0.60 and $0.70. Analysts' average expectations are well north of the high end of the company's guidance ranges, which helps explain why shares of RH are down 19% in early trading.
The disappointing outlook was attributed to business in November coming in below expectations, which the company felt had to do with consumer softness related to the U.S. election and the Fall 2016 Source Books getting to homes later than the company planned. Additionally, sales of the company's holiday collection are trending lower than it previously expected.
The late arrival of the Source Books, the company said, is shifting sales that would have been booked in the fourth quarter this year into the first quarter next year. The company didn't provide any first quarter guidance, yet it goes without saying that management will be put to the test with this clarification when the company reports its fourth quarter results and presumably issues first quarter guidance.
With the weakness in its holiday collection sales, Restoration Hardware said it will be stepping up its markdown activity to help get inventories in check. That is going to lead to lower product margins, which is feeding into the disappointing fourth quarter guidance.
In turn, that guidance is feeding into disappointing fiscal year 2016 guidance, which calls for net revenues to be in the range of $2.11 billion to $2.14 billion, flat to up 1% versus last year, and adjusted diluted EPS in the range of $1.19 to $1.29. In fiscal 2015 the company reported net revenues of $2.11 billion and adjusted diluted EPS of $2.72.
Restoration Hardware expressed some optimism about its longer-term outlook and pointed to a number of factors, like the anniversary of costs related to the launch of RH Modern and revenues building from the mailing of its 2016 Fall Source Books, as a basis to feel better about its fiscal 2017 prospects. Nonetheless, the stark disappointment of the fourth quarter outlook appears to have left investors with the mindset that seeing is believing.
Fred's [FRED] Sales Disappoint; 'Pending Transaction' Piques Interest
Discount retailer/pharmacy Fred's (FRED) is indicated lower premarket after the company reported a larger than expected Q3 (October) net loss.
In early November, the company preannounced light Q3 sales, with comps down -3.8%, and suspended guidance for the second half of fiscal 2016.
Fred's had numerous reasons for the weak sales: challenges in transitioning to a third party vendor, the Halloween calendar shift in to November, a slowdown in HCV drug prescriptions, warm weather, etc.
This afternoon, Fred's also reported weak November sales, with comps down 2.9%, reflecting 'continued challenges in both front store and pharmacy sales', but management did not provide guidance for the fourth quarter.
Competition is tough among discount retailers in the Southeast where Fred's is located. Dollar General (DG), Dollar Tree (DLTR) and Wal-Mart (WMT) are all competitors.
Weak Q3 sales and the suspension of 2H guidance (which previously called for flat comps) sent the stock to an eight year low in early November as the company had missed same store sales estimates for the third quarter in a row.
However, the stock has since rallied, seemingly with the broader market, as retail stocks (XRT) have surged since the election.
Last week, Fred's postponed its Q3 release to today (originally scheduled for December 2), without providing any reason. The company also postponed its Analyst Day without providing an updated timeline.
On the call last night, management did not take any questions on the call 'due to pending transaction'. CEO Michael Bloom said there can be no assurance that the transaction will take place. Bloom took over in August when Jerry Shore announced his retirement. He is leaving the company in February. Management also discussed ways to improve operations, including plans to close 40 underperforming stores next year.
The 'pending transaction' is certainly an area of interest that may lead to speculation around the stock. One possible scenario could be that Fred's (FRED) may be a good candidate to acquire the Walgreens Boots Alliance (WBA) stores that company needs to divest in order to get their acquisition of Rite Aid (RAD) approved by regulators.
Walgreens reportedly needs to shed at least 500 stores to appease the FTC. The Rite Aid acquisition was initially announced all the way back in October of last year. Walgreens expects to divest the required stores by the end of the year in order to close the Rite Aid deal by early 2017.
If this were the scenario in play, it's impossible to know whether there would be one or more buyers of the stores, so it's hard to say how big of a deal it would be if Fred's were involved. However, it could potentially be a big deal for Fred's, which currently owns 647 stores, 370 which have a full-service pharmacy department. We don't have any knowledge of anything, so this is pure speculation, but whatever the 'pending transaction' turns out to be, it sure to be of great interest to FRED investors and could be a catalyst for the stock.
Fred's (FRED) has a $368 million market cap. The company earned close to $1.00/share on an adjusted basis from fiscal 2011 through fiscal 2014 but has struggled to remain profitable for the last three years.
Biggest IPO of the Week Athene [ATH] Begins Trading Today
The biggest IPO of the week - Athene Holding (NYSE) - will begin trading this morning under ticker symbol "ATH".
Athene priced its upsized 27 million share IPO at $40 per share, the mid-point of the $38-42 expected range. The deal is being led by tier one investment banking firms including Goldman Sachs and Barclays.
The company provides retirement services, issuing, reinsuring, and acquiring retirement savings products. A quick look at the financials shows the firm has $87.0 billion in total assets and $71.6 billion in invested assets.
Athene began operating in 2009, in the aftermath of the financial crisis, which resulted in capital demands that caused many companies to exit the retirement market. This created an opening and opportunity for ATH to fill a void, and it was able to take advantage of certain market dislocations. For instance, the firm acquired substantial blocks of long-duration liabilities and reinvest the related assets to produce solid returns.
The company operates one segment, Retirement Services, which has retail operations that provide annuity retirement solutions to its policyholders. It also has reinsurance operations which reinsure multi-year guaranteed annuities, fixed indexed annuities, traditional one year guarantee fixed deferred annuities, and institutional products from its reinsurance partners.
To date, most of its products sold and acquired have been fixed annuities, which offer people saving for retirement a product that is tax-advantaged, has a minimum guaranteed rate of return, and provides protection against investment loss.
The company also benefits from its relationship with Apollo Global Management (APO) and its indirect subsidiary, Athene Asset Management. Athene Asset Management serves as ATH's investment manager. In addition to co-founding the company, Apollo assists in identifying and capitalizing on acquisition opportunities that have been critical in its ability to grow the business. It should also be noted that the Apollo Group controls 45% of the total voting power of ATH.
As a provider of retirement savings products, the increase in the retirement age population is, and will continue to provide a tailwind for its business, as demand for annuities should be bolstered by the need for guaranteed income streams and the expanding retirement population's insufficient savings base.
Taking a look at its financials, for the nine months ended September 30, 2016, revenue increased by 88% year/year, driven by favorable changes in investment related gains and losses, an increase in net investment income, and an increase in premiums. Net income increased sharply by 37% to $437 million and ROE also improved to 9.4% from 8.5%.
Overall, ATH's financials look pretty healthy, although it doesn't expect to pay a dividend.