Looking Ahead - May 27, 2016
A number of Federal Reserve officials have put the market on notice recently that the Federal Reserve might elect to raise the fed funds rate at its June 14-15 meeting. Notwithstanding those declarations, the market is most interested in hearing from one person in particular about the potential path for the fed funds rate. That person is none other than Fed Chair Yellen who will be speaking on Friday.
Dollar Tree: Consumers opt for more wallet-friendly shopping; Q1 beats, aided by Family Dollar
Discount retailer Dollar Tree (DLTR 88.02, +9.66) is trading 12.3% higher, at new all-time highs, this afternoon as the company reported a mostly better than expected Q1 as the recently acquired Family Dollar aided results. DLTR also issued some tepid Q2 guidance, and raised certain FY17 guidance.
For Q1, DLTR reported better than expected earnings per share (EPS) of $0.89 on revenues which came in mostly in-line with expectations and grew 133.6% versus last year, aided by the aforementioned addition of Family Dollar, to $5.09 billion.
Revenues included nearly $2.70 billion from Family Dollar stores, sales from new DLTR stores, and a 2.3% increase to same-store-sales (Q1 last year posted a 3.4% SSS growth) on a constant currency basis. Management noted the positive SSS results was a product of increases in both customer transactions and average ticket. Adjusted for the impact of Canadian currency fluctuation, SSS were up 2.2%.
Looking ahead, DLTR sees worse than expected Q2 EPS in the range of $0.66-0.72 on in-line revenues of $5.03-5.12 billion with comps coming in low single digits. For the FY17 period, DLTR now sees EPS in the range of $3.58-3.80, up from $3.35-3.65. The company also narrowed the expected revenue range for FY17 to $20.79-21.08 billion, from $20.76-21.11 billion. For FY17, DLTR also expects low single digit comps.
It appears that consumers are opting to shop at a discount retailer rather than names like Target (TGT 69.57, +0.29 +0.42%) and J. C. Penney (JCP 7.70, -0.21 -2.59%), both of which saw sales pressure in their current quarterly results. Overall, the retail space, especially brick and mortar stores, have been pressured as consumers cut spending and opt for a more online shopping experience.
A Healthy Appetite For US Foods'
The country's second largest food distributor is off to a solid start this morning with its 44.4 million share IPO pricing towards the high end of expectations at $23, versus the $21-$24 projected range. Then, shortly after the market opened, shares of USFD opened for trading at $24.25, good for a 5% gain versus its IPO price. Since then, the stock has continued to push higher, currently trading at $24.88. So, all in all, it has been a very successful debut for USFD.
Closer Look at USFD
USFD is second only to Sysco (SYY) in the foodservice distribution industry in the U.S., in terms of revenue. In estimates its market share to be about 9%, which might seem low for the nation's second largest company. But, again, it is a highly fragmented industry with many regional players, each claiming a small percentage of the market.
The company supplies approximately 250,000 customer locations, including single and multi-unit restaurants, regional and national restaurant chains, hospitals, nursing homes, hotels, government and military organizations, and universities. It provides over 400,000 fresh, frozen, and dry food SKUs, in addition to non-food items.
The customer base is very diverse, but, it does focus more intently on a couple distinct markets -- namely, independent, small chain, and regional chain restaurants, and healthcare and hospitality customers. These customers accounted for 66% of net sales in FY15, up a tick from 65% in 2014.
USFD says that its nationwide reach means that it can serve large regional or multi-regional customers who want a more seamless experience across the geographies they serve. This scale provides several advantages over local distributors as USFD achieves volume savings across the board. It also benefits from greater efficiencies of scale for many functions, like accounting, payroll, and taxes, resulting in lower unit costs.
Acquisitions a Core Strategy
Given the slow-growth nature of the food distribution industry, and the fact that it is highly fragmented, it comes as no surprise that acquisitions have been a key component of USFD's growth strategy. From FY10 through FY13, USFD has made twelve acquisitions, including distributors with local strength, and specialty distributors with a specific focus like ethnic food or product categories.
More recently, in December 2015, it acquired Dierks Waukesha in Wisconsin, which generated about $120 million in annual sales. Then, this past March, USFD acquired Cara Donna Provision, giving the company more exposure to the northeast region of the U.S. Cara Donna Provision has annual sales of about $100 million. Both of these acquisitions also bolster USFD's independent restaurant business.
USFD doesn't anticipate slowing down, either, in its pursuit of acquisitions. Since the industry is so fragmented, it sees plenty of opportunities that could generate attractive ROIs from the revenue and cost synergies it could capture from integrating the acquired businesses into its operations.
For FY15, revenue was essentially flat y/y at $23.1 billion, after inching higher by 3.2% in FY14. So, for investors looking for an exciting revenue growth story, USFD is going to come up woefully short. And, given its huge revenue base and the dynamics of the food distribution industry, its revenue growth rate isn't going to dramatically improve (unless it comes from un-organic means).
What USFD lacks in growth, it makes up for in predictability and cash flow generation. In FY15, the company generated $368 million in free cash flow, up 44% year/year. The company is also profitable, registering $190 million in operating profit last year.
However, another blemish is the massive amount of debt on its books, standing at a staggering $5.0 billion as of April 2, 2016. This, of course, is resulting in huge interest payments. Last year alone, it shelled out $285 million to service that debt. The primary cause of this debt burden stems from it being purchased by private equity firms CD&R and KKR in a leveraged buy-out in 2007.
Titan Machinery [TITN] Lower Following Earnings/Guidance
Machinery (TITN 11.00 -0.31) reported a first quarter loss of $0.21 per share, excluding
non-recurring items, which fell short of expectations. On the top
line, revenues fell 19.3% year/year to $284.9 million, which also fell a bit
short of expectations.
Gross profit for the first quarter of fiscal 2017 was $53.5 million, compared to $60.4 million in the first quarter last year, primarily reflecting a decrease in revenue. The company's gross profit margin was 18.8% in the first quarter of fiscal 2017, compared to 17.1% in the first quarter last year.
This increase in gross profit margin was mainly due to an increase in equipment margins and the change in gross profit mix to the Company's higher-margin parts and service businesses. Gross profit from parts, service and rental and other for the first quarter of fiscal 2017 was 72.8% of overall gross profit, compared to 70.3% in the first quarter last year.
However, pre-tax income in each segment came in at a loss... agriculture, construction and international. No profit to be seen in one segment.
David Meyer, Titan Machinery's Chairman and Chief Executive Officer, stated, "First quarter financial results were in-line with our expectations and we are on track to achieve our $100 million inventory reduction goal and modeling assumptions for fiscal 2017. As expected, we continue to face headwinds in the agricultural and construction segments, but believe we are well positioned to generate positive adjusted operating cash flow for fiscal 2017 due to improvements we have made in our operating expenses and planned reduction in our inventory."
"We are confident we are taking the necessary steps to navigate through this challenging environment and are ahead of schedule in the marketing of our aged inventory, having sold $25 million of the $74 million targeted aged equipment inventory in the first quarter of fiscal 2017, which exceeded our first quarter target of $22 million. The deleveraging that we've accomplished in the past couple years and our expected continued operating cash flow enabled us to buy back $30.1 million of our senior convertible notes ahead of the maturity date and at a meaningful discount. This transaction further strengthened our balance sheet while providing a positive financial gain to our stockholders in the first quarter of fiscal 2017."
The company reiterated the following modeling assumptions for fiscal 2017:
Abercrobie & Fitch
Abercrombie & Fitch (ANF) is trading sharply lower today (-12%) after reporting disappointing Q1 (Apr) earnings results this morning. You're probably familiar with Abercrombie & Fitch, but just in case, they are a retailer of casual apparel/accessories for young men, women and children. Its brands include Abercrombie & Fitch, abercrombie kids and Hollister Co. ANF currently operates 745 stores in the US and 180 stores across Canada, Europe, Asia and the Middle East.
The brand has stumbled in recent years as it failed to change with the times. A big part of its problem is that young people's tastes are changing. If you have ever been to an Abercrombie store, you would have seen the A&F logo everywhere. It's often in huge print on their shirts and sweatshirts. However, young people are moving away from logos, it's not as cool anymore as they would rather embrace individuality. Also, young people are moving to trendier/cheaper alternatives (Forever 21 and H&M) so they can change fashion choices more quickly.
To combat this, ANF has been making some changes. A big change was its CEO Michael Jeffries resigning in December 2014. After searching for the right CEO and not finding the right match, the company has suspended its search for a new CEO. Instead, ANF is being run by several executives that have shared power. They all report to Executive Chairman Arthur Martinez.
They did recently promote Fran Horowitz, President of its Hollister brand (which has been outperforming the Abercrombie brand), to President & Chief Merchandising Officer of the entire company. In this newly created position, Horowitz will have responsibility for all of the company's brands, reporting to the Executive Chairman.
In addition to management changes, Abercrombie has been revamping its stores and fashion choices with the hope of reconnecting with teen shoppers. The company hired new designers. The look and the feel of its stores are changing -- new music and lighting. ANF has even changed how it stacks clothes in stores and replaced its logo-centric clothes with trendier new styles in denim and floral prints. The company has also reduced promotional activity and has done a better job in terms of managing inventories.
Also, ANF has been closing underperforming stores as leases expire. Of note, nearly 70% of its US leases are expiring by the end of 2017, so ANF expects to have significant flexibility in terms of closing underperforming stores in the next two years. ANF says it expects to close up to 60 stores this fiscal year through lease expirations.
Turning to the Q1 (Apr) results, ANF reported a non-GAAP loss of $(0.53), which was slightly below market expectations. Revenue fell 3.3% year/year to $685.5 mln, which was a good amount below market expectations. Same store comps were down -4% in AprQ. Breaking it down by brand, Abercrombie was -8% and Hollister was flat, so it's clear the Abercrombie brand is where the troubles are.
ANF says the AprQ results reflect significant traffic headwinds, particularly in international markets and in its US flagship and tourist stores, resulting in negative comps. However, in the face of these headwinds, ANF was encouraged by its US business, where comps improved in the Hollister brand, and gross margin increased meaningfully for both brands. Also, its assortment and customer-centricity efforts are driving improved conversion. Also, expenses and inventory are being well controlled.
Looking ahead, ANF expects Q2 (Jul) comps to remain challenging, but to see better results in the back half of the year as its assortments continue to improve and as ANF starts to see returns from the significant investments made in terms of marketing, store management and omnichannel. In addition, with the new brand presidents and other key roles now filled, ANF believes it has a strong team in place to drive its brands forward.
Probably the best metric to gauge ANF's turnaround performance is its same store sales and there had been improvement until this quarter. Same store comps were -8% in Q1 (Apr) of last year, which improved to -4% in Q2 (Jul), -1% in Q3 (Oct) and then positive comps in Q4 (Jan) at +1%. Comps had been trending nicely higher so to report a -4% comp in Q1 (Apr) was disappointing to investors.
In sum, this was not a great quarter for ANF. It seems the turnaround is going to take some time as JulQ comps are expected to be rough again. However, it seems the back half of the year should see some improvement.
Signet Jewelers [SIG] Reports Slight Earnings Beat
Signet Jewelers (SIG 109.00, +0.63) reported a slim bottom-line beat on light revenue and its stock has responded by inching up in the early going.
The company reported first-quarter earnings of $1.95 per share on $1.58 billion in revenue, which increased 2.9% year-over-year, but did not live up to analysts' average expectations.
Signet's revenue growth was fueled by a 2.4% increase in same store sales. However, that was short of the company's guidance for growth between 3.0% and 4.0%. It was also below the 3.6% increase recorded during the same quarter a year ago.
Signet operates several different brands, which had a mixed showing in the first quarter. Same store sales at Kay (+4.7%), Zales Jewelers (+3.1%), Zale US Jewelry (+2.4%), Zale Jewelry (+2.0%), Piercing Pagoda (+5.6%), H. Samuel (+2.7%), and Ernest Jones (+4.0%) increased on a year-over-year basis. Conversely, same store sales at Jared (-1.7%), Gordon's Jewelers (-9.3%), Peoples Jewelers (-0.5%), Mappins (-1.6%), and Zale Canada Jewelry (-0.6%) contracted.
The company's gross margin was reported at 38.0% of sales, which represents a 100-basis point improvement from the same quarter a year ago. The improvement occurred thanks to the Zale division and gross margin synergies like sourcing, favorable commodity costs, and leverage on store occupancy.
The company noted that its acquisition of Zale, which was completed almost two years ago, is progressing smoothly with synergies remaining on target. The company expects that this year's savings will be driven by lower operating expenses.
Going forward, Signet expects second-quarter earnings between $1.49 per share and $1.54 per share, which is in line with market expectations. Full-year guidance for earnings between $8.25 per share and $8.55 per share also matches analysts' average expectations.
Shares of Signet Jewelers have shown some early strength, but overall, the stock remains near this month's high and near the middle of this year's range.
Infoblox [BLOX] set to open lower following in-line results & guidance; announces restructuring
Infoblox (BLOX) is indicated to open flat to down approximately -3% this morning (on very thin pre-market volume) after the company reported generally in-line Q3 results and Q4 guidance, but announced a restructuring and provided mixed commentary on the upcoming FY17 (July).
If you're not familiar with the company, BLOX sells software & appliances that provide network automation and security. The company's products manage such critical functions as Internet domain name server (DNS) resolution, IP address management (IPAM), and network access control. Basically, BLOX's products take day-to-day network tasks that have historically been manually done, and automates them; this makes networks more reliable, cheaper to operate, improves security, and enables better auditing.
The company has had a mixed record over the past three years, and has generally been considered a turnaround story in Tech. Recently, on May 9 the company lowered its 3Q16 (April) and FY16 (July) revenue guidance by substantial amounts, with management attributing the shortfalls to: "general softness in IT spending that is also being reported by other enterprise vendors." Management further stated that: "The impact was primarily in North America, where several customers delayed purchases toward the end of April. The tailwind from the product upgrade cycle has also tapered down more quickly than we originally forecast, and we believe it will not drive significant product revenue in our fourth fiscal quarter..."
Q3 Results & Guidance:
Last night the company reported 3Q16 (April) results that were in-line with its May 9 guidance of $81-$82 million in sales and EPS of $0.05-0.06. Specifically, Q3 sales rose +5% to $82.0 million, which was the slowest quarter of sales growth since the October 2014 quarter, while EPS declined -50% to $0.06.
For 4Q16 (July), the company sees revenues of $82-86 million and EPS of $0.05-0.07, which were in-line with investor expectations.
Within the press release, management provided some color commentary on their quarter and outlook: "While we continue to make good progress in product development, delivering products and services that support our customers' needs in core DDI, extending DDI to cloud environments, and securing their DNS infrastructure, our revenue results were weaker than we anticipated in what was a weaker than expected spending environment combined with a more rapid tapering down of our product upgrade cycle than we anticipated. Looking forward, a key priority is driving top line growth more profitably. We are taking actions to drive improved efficiency across the company and significantly higher operating margins in fiscal 2017. Importantly, we believe our competitive position continues to be strong, our addressable market is growing, and we are optimistic about the opportunities before us."
While the company did not provide formal guidance for the upcoming FY17 (July), during the conference call management stated that they are currently planning for revenue growth in the low- to mid-single digits, and they expect total billings growth to exceed revenue growth by a few percentage points. Regarding operating profits, management stated that "we will begin taking steps during the current quarter to address the overall cost structure of the company and we plan to reduce costs to lower the expense run rate... For 2017, we are planning for operating margin to be in the mid-to high-teens for the full fiscal year, exiting Q4 with operating margin of approximately 20%." This operating margin guidance was significant, in that it was well above the company's operating margin forecast of "approximately 11%" for the current FY16 (July).
Separately, the company announced that its board of directors approved a $150 million increase to their share repurchase program.
Costco [COST] Climbs After Earnings Beat
Costco (COST 148.20, +3.66) reported mixed results this morning, which have sent the stock higher by 2.5% in pre-market action.
The wholesale retailer delivered above-consensus third-quarter earnings of $1.24 per share on $26.77 billion in revenue. The company's top line increased 2.6% year-over-year, but was still short of market expectations.
Comparable store sales were unchanged during the first quarter, but some minor fluctuations took place when looking at the regional breakdown. U.S. sales were flat, Canada sales increased 1.0%, and Other International sales declined 2.0%. On a fiscal year-to-date basis, total sales are also flat with U.S. sales up 2.0%, Canada sales down 5.0%, and Other International sales down 4.0%. Dollar strength and lower gasoline prices kept the growth rate unchanged while total sales, excluding negative impacts from gasoline price deflation and foreign exchange, increased 3.0% during the quarter and are up 5.0% through the first three quarters of the fiscal year.
Revenue from membership fees increased 5.8% year-over-year to $618 million, net income improved 5.6% to $545 million, and operating income grew 4.5% to $858 million.
Shares of Costco are on track to begin the day near levels last seen in early May after marking a fresh 2016 low last week.
Movado [MOV] Off Time with Lowered FY17 Guidance
It's a tough environment out there for a lot of retailers and Movado Group (MOV 23.76) has not been exempt from the difficulties. Earlier today, the luxury watch maker reported mixed first quarter results and lowered its annual outlook.
The lackluster showing and outlook may not be much of a surprise to investors considering shares of MOV have declined 22% since early March. In turn, Tiffany & Co. (TIF 63.89) checked in with a disappointing report and outlook of its own on Wednesday but finished slightly higher for the session.
With respect to Movado, it reported a 5.3% decline in net sales to $114.1 million and an adjusted profit of $0.19 per diluted share that was down 24% on a comparable basis to the first quarter a year ago. The company's sales were below analysts' average expectation while its earnings per share were ahead of analysts' average expectation.
The earnings beat was helped in part by a higher gross profit, which the company said flowed from a favorable impact of changes in foreign currency exchange rates, selective price increases, certain sourcing improvements, and channel and product mix.
Nevertheless, Movado felt compelled to lower its annual outlook "...given current retail trends, particularly in the fashion watch category in the United States." Movado is now forecasting fiscal 2017 net sales in the range of $565 million to $585 million and adjusted net income to be between $1.55 and $1.70 per diluted share.
Following its fourth quarter report in March, Movado said it was expecting fiscal 2017 net sales to be between $585 million and $600 million and its adjusted net income to be between $1.85 and $2.00 per diluted share.
The company will be holding a conference call at 9:00 a.m. ET today to discuss its results.