Updated: 08-17-2018

Quotes at time of story, top stories today: 12:23PM | 12:08PM | 10:50AM | 09:47AM | 09:37AM | 09:22AM | 09:02AM

12:23PM ET
Nordstom surges on best sales in three years as mgmt confirms inflection in profit outlook

Nordstrom (JWN) is up 11% after the company reported its best same-store sales growth in three years.

Second quarter earnings grew 46% to $0.95/share. Comparable store sales grew 4% on top of 1.7% growth last year.

Comp sales were expected to grow just under 1%. Sales growth accelerated in the full-price (+4.1%) and off-price (+4.0%) segments.

Digital sales grew 23% -- up 300 basis points from a year ago -- and accounted for 34% of sales, up from 29% last year.

Following strong results from the first half of the year, Nordstrom raised guidance for fiscal 2019:

  • Sales to $15.4-15.5 billion from $15.2-15.4 billion; comparable sales to +1.5-2.0% from +0.5-1.5%, EBIT to $925-960 million from $895-940 million and EPS to $3.50-3.65 from $3.35.

Management said it was on track for an inflection point in profitable growth after years of investing in its business.

EBIT has fallen four years in a row after peaking at $1.36 billion in fiscal 2014 (2013) but is now expected to grow 2% this year.

At its Investor Day last month, the company said EBIT (profit) would grow 5-6% on average through 2022 as net sales grow 3-4% and free cash flow would reach $1 billion by 2022 from $0.6 billion last year.

The stock has broken out to a 20-month high.

In a retail environment that has parsed winners from losers, Nordstrom stands out as the leading high-end department store with a strong discount segment in Nordstom Rack.

Therefore, investors are willing to give pay a higher earnings multiple for the stock: JWN trades at 16x EPS estimates versus Macy's (M) at 9x and Kohl's (KSS) at 14x.

12:08PM ET
Looking Ahead - August 20, 2018 - Bundesbank Monthly Report

The next week should be off to a quiet start, considering the lack of noteworthy earnings or economic releases scheduled for Monday morning. However, Germany's central bank, Deutsche Bundesbank, will release its monthly report for August, which could garner some attention, given the sparse event schedule.

Bundesbank Monthly Report (Monday, August 20, at 6:00 a.m. ET)

  • Why it's important
    • The German economy is the growth engine of the European Union, therefore fresh commentary on the state of affairs from the country's central bank may influence the outlook for growth in the region.
    • The monthly report covers a broad range of subjects, including economic conditions, public finances, securities markets, and balance of payments.
  • A closer look
    • The July report noted that while the German economy gained only slight momentum in July, industrial output increased at a strong rate with new orders resuming their upward climb.
    • The July report acknowledged a continuation in the country's construction boom while employment metrics improved. Upward pressure on consumer prices was described as moderate, though import prices excluding energy increased sharply as the euro weakened.
    • In addition to the usual subjects, the July report included commentary on the Chinese economy and a study of potential spillover effects that could result from a sharp downturn in China.
  • What's in play?
    • Currencies:
      • EUR/USD
      • EUR/GBP
      • EUR/JPY
    • German Equities:
      • DAX Index
      • iShares MSCI Germany ETF (EWG)

10:50AM ET
Deere makes red-to-green move; Q3 earnings fall short owing to cost pressures

Deere (DE 137.48, +0.13, +0.1%) touched three-month lows this morning, though now trades higher off those levels, after continued cost pressures culminated in a third quarter earnings miss and worse than expected fourth quarter guidance.

Management stated Deere, 'continued to face cost pressures for raw materials and freight' during the third quarter, though added the caveat that cost management actions are being implemented. Specifically, in Q3 Deere's cost of sales increased 36.3% to $7.15 billion with a 14.2% increase in SG&A.

Cost pressures led to Deere reporting worse than expected third quarter net income of $2.59 on revenue growth of 35.8% to $9.29 billion. Affecting results for the third quarter and first nine months of 2018 were provisional adjustments to the provision for income taxes due to the enactment of U.S. tax reform legislation on December 22, 2017 (tax reform).

Equipment net sales in the United States and Canada increased by 29% for the quarter and 27% year to date, with Wirtgen adding 6% and 4% for the respective periods. Outside of the U.S. and Canada, net sales rose 45% for the quarter and 42% for the first nine months, with Wirtgen adding 31% and 23% for the periods. Net sales included an unfavorable currency-translation effect of 1% for the quarter and a favorable effect of 3% for nine months.

Financial services reported net income attributable to Deere & Company of $151.2 million for the quarter. Results benefited from a higher average portfolio and a lower provision for credit losses, partially offset by less-favorable financing spreads. Additionally, provisional income tax adjustments related to tax reform had favorable effects of $3.6 million for the quarter.

By segment:

  • Agriculture & Turf. Sales rose 18% for the quarter and 19% for the first nine months due to higher shipment volumes as well as lower warranty expenses and price realization. Currency translation had an unfavorable impact on sales for the quarter and a favorable effect for nine months. Operating profit was $806 million for the quarter and $2.249 billion year to date, compared with respective totals of $693 million and $1.920 billion last year. The improvement was driven by higher shipment volumes, lower warranty-related expenses and price realization, partially offset by higher production costs and research and development expenses.
  • Construction & Forestry. Construction and forestry sales increased 100% for the quarter and 83% for nine months, with Wirtgen adding 77% and 56% for the respective periods. Foreign-currency rates did not have a material translation effect on sales for the quarter but had a favorable impact for nine months. Both periods were favorably affected by lower warranty expenses and negatively affected by higher sales-incentive expenses. Operating profit was $281 million for the quarter and $573 million for nine months, compared with $111 million and $259 million last year. Wirtgen contributed operating profit of $88 million for the quarter and $37 million year to date. Excluding Wirtgen, the improvements were primarily driven by higher shipment volumes and lower warranty expenses, partially offset by higher production costs and sales-incentive expenses.

Deere outlook:

  • Company equipment sales are projected to increase by about 30% for fiscal 2018 and by about 21% for the fourth quarter compared with the same periods of 2017. Of these amounts, Wirtgen is expected to add about 12% to Deere sales for both the full year and fourth quarter. Foreign-currency rates are not expected to have a material translation effect on equipment sales for the year but are anticipated to have an unfavorable effect of about 3% for the fourth quarter.
  • Net sales and revenues are expected to increase by about 26% for fiscal 2018 with net income attributable to Deere & Company forecast to be about $2.360 billion. The company's net income forecast includes $741 million of provisional income tax expense associated with tax reform, representing discrete items for the remeasurement of the company's net deferred tax assets to the new U.S. corporate tax rate and a one-time deemed earnings repatriation tax. Adjusted net income attributable to Deere & Company, which excludes the provisional income-tax adjustments associated with tax reform, is forecast to be about $3.1 billion.
  • Deere's worldwide sales of agriculture and turf equipment are forecast to increase by about 15% for fiscal-year 2018, with foreign-currency rates not expected to have a material translation effect. Industry sales of agricultural equipment in the U.S. and Canada are forecast to be up about 10% for 2018, led by higher demand for large equipment.
  • Deere's worldwide sales of construction and forestry equipment are anticipated to be up about 81% for 2018, with foreign-currency rates not expected to have a material translation effect. In forestry, global industry sales are expected to be up about 10% mainly as a result of improved demand throughout the world, led by North America.
  • Fiscal-year 2018 net income attributable to Deere & Company for the financial services operations is projected to be approximately $815 million, including a provisional income tax benefit of $232 million associated with tax reform. Excluding the tax benefit, adjusted net income attributable to Deere & Company is forecast to be $583 million.

Deere's red-to-green move isn't enough for the stock to recoup the 50-day simple moving average yet (142.22).

09:47AM ET
Endava is a recent tech IPO that has quietly made a nice move since its IPO debut

Recent IPO Endava (DAVA) has quietly made a strong debut since it entered the public markets in late July. Endava is a UK-based next-generation technology services provider. It helps clients undertake digital transformations. From proof of concept, to prototype, to production, Endava uses its engineering expertise to deliver enterprise platforms capable of handling millions of transactions per day.

At the core of Endava's approach is its proprietary Distributed Enterprise Agile scaling framework, known as The Endava Agile Scaling framework, or TEAS. Endava has a deep familiarity with many technologies, including mobile connectivity, social media, automation, big data analytics and cloud delivery, as well as next-generation technologies such as IoT, artificial intelligence, machine learning, augmented reality, virtual reality and blockchain.

Technological transformation poses numerous challenges for companies. These companies are often laden with legacy infrastructure and applications that are deeply embedded in core systems. While companies have historically looked to traditional IT service providers to undertake technology development projects, these traditional players are more focused on legacy systems using offshore delivery. Endava's expertise spans the ideation-to-production spectrum across three broad areas: Digital Evolution, Agile Transformation and Automation.

Endava, which is based in London, provides services from its nearshore delivery centers, located in two EU countries (Romania and Bulgaria), three other Central Europe countries (Macedonia, Moldova and Serbia), and four countries in Latin America (Argentina, Colombia, Uruguay and Venezuela). Endava has close-to-client offices in four Western European countries (Denmark, Germany, the Netherlands and the UK) as well as in the US. Endava currently has 4,700 employees, approximately 53.7% of whom work in nearshore delivery centers in EU countries. Endava has 249 active clients.

Turning quickly to the financials, the company is profitable and growing nicely. It has a June 30 fiscal year end. Revenue for the nine months ended March 31, 2018 rose 34% YoY to US$219.1 mln. It has decent operating margin of 12.2% but not huge. Although they may report a higher non-GAAP margin number when they report for the first time as a public company.

The stock has made a nice move since coming public on July 27. The 6.34 mln share IPO priced at $20, above the expected $17-19 range. It then opened at $25.00 and quickly traded as high as $30.50 in mid-August. It has a lot of what investors like to see in an IPO: low float, tech space, growing nicely, profitable etc.

Looking ahead, in terms of catalysts, they have an upcoming Q4 (Jun) earnings report. However, no date has been set yet. Also, we would expect some bullish sell side initiations on the stock once the quiet period ends in the next couple of weeks. The deal had some notch underwriters, led by Morgan Stanley, Citigroup, Credit Suisse, Deutsche Bank. So we would expect some initiation reports from them soon. On a final note, these tech IPOs can be pretty volatile so you have to be cautious. However, Endava has gotten off to a good start and it seems to have some good attributes. It's worth keeping on the radar.

09:37AM ET
Zoe's Kitchen Challenging Time as a Public Company Closes in a Buy-out
Zoe's Kitchen's (ZOES) time as a publicly traded company was short-lived as the company was bought out this morning by Cava Group for $12.75 per share in cash. ZOES was actually expected to issue its Q2 results before the open today, but, last night the company postponed the release. That news initially had the stock trading lower by about 4% as investors worried about whether the results would be weak, or, perhaps whether there could be some kind of auditing/re-statement issue in regards to its results.

But, the acquisition price of $12.75 is 33% higher from yesterday's close. Still, the stock is a long ways from where it was when it first debuted back in April of 2014.

For those not familiar, ZOES is a fast-casual restaurant concept that serves Mediterranean-inspired food. Its menu features Mediterranean cuisine complemented with several Southern staples. ZOES offers items such as its Mediterranean Tuna sandwich and entres such as chicken, steak and salmon kabobs and chicken and spinach roll-ups (tortillas stuffed with feta cheese, grilled chicken, sundried tomatoes and spinach). Each is served with a choice of a side item such as braised rosemary white beans, rice pilaf, pasta salad, roasted vegetables or seasonal fruit.

When ZOES went public, it had 111 restaurants across 15 states, with a strong presence in the south -- notably Texas (29 locations), Alabama (14), and Georgia (13). It has expanded pretty rapidly, though, and now has 261 locations over 20 states. Its growth potential is what really had investors excited prior to its IPO. In fact, in its IPO prospectus, the company said that it had the potential to operate over 1,600 restaurants over the long-term.

The growth potential certainly caught many investors' attention. In the week prior to its IPO, ZOES raised the expected price range to $13-$15 from $11-$13. On April 11, 2014, it ultimately priced at $12 and then opened for trading with a whopping 71% gain to $25.65. From there, the stock gradually cruised all the way up to the $40 level by July of 2015.

However, the marked the high-point for ZOES. Since then, the stock has been mired in a steady down-trend with shares sinking below $10 this past spring. Slumping growth, in particular on a comparable restaurant sales basis, and inconsistent results relative to consensus expectations has pressured the stock. For instance, taking a look at the past three quarters, comparable restaurant sales declined by 2.3% last quarter, were up a modest 0.3% in Q4, and were down 0.5% in Q3. As its comparable sales slid, ZOES also began to ratchet back its expansion plans.

ZOES was certainly struggling so the buy-out might be welcomed news to investors. That said, at $12.75, a vast majority of investors would still be underwater. And, Cava Group, which itself owns 66 Mediterranean inspired restaurants, would be paying less than 1x FY19 revenue for ZOES, so, some investors may view the price tag as being a bit light.

In any event, ZOES short history as a public company offers yet another example of how challenging the restaurant business can be. What started out as such a bright story faded over time, culminated in an acquisition price that is 15% lower than its IPO price.

09:22AM ET
Cautious Guidance Overshadows Another Stellar Quarter From NVIDIA

NVIDIA (NVDA 252.30, -5.14) is lower by 2.0% in pre-market, as the company's cautious guidance overshadows better than expected quarterly results.

The high-flying GPU manufacturer reported above-consensus second quarter earnings of $1.94 per share on a 40.0% year-over-year increase in revenue to $3.12 billion, which was just ahead of estimates.

Granted, NVIDIA's quarterly results lived up to expectations, but the company issued its first below-consensus guidance in almost three years. Our Story Stocks comment from August 14 noted that the company is likely to see a slowdown in demand from cryptocurrency miners, but the somewhat cautious outlook also left the door open to questions about the availability of the next line of GeForce GTX graphics cards, which are responsible for the bulk of the company's revenue (57.8% during the second quarter).

The company acknowledged that it went into the second quarter expecting a $100 million contribution from sales to cryptocurrency miners, but the actual contribution was only $18 million. Going forward, the company no longer expects any contributions from this market.

During yesterday's conference call, Chief Executive Officer Jen-Hsun Huang touted the technological leap achieved in the recently-announced Turing-based GPUs for visual professionals. However, Mr. Huang did not give any indication about the expected availability of Turing-based GeForce video cards for the consumer market, other than telling attending analysts to 'stay tuned.'

The company's last refresh of the GeForce GTX line took place in May 2016, meaning the company has lengthened its product cycle past the usual 18-24 months. It is typical for a product launch to cause a spike in demand (and revenue), but NVIDIA's guidance suggests the launch of the next line of GeForce cards may not happen in the third quarter, or happen late enough so there is no meaningful boost to revenue from new product sales.

Chief Executive Officer Jen-Hsun Huang remained wildly optimistic about the company's smaller segments like Professional Visualization (Q2 revenue +19.6% y/y to $281 mln), Datacenter (Q2 revenue +82.7% y/y to $760 mln), and Auto (Q2 revenue +13.4% y/y to $161 mln), but the market remains eager to hear when the company will be ready to unveil the next generation of GeForce GTX cards, which should sustain the strength of revenue growth in the company's main Gaming segment (Q2 revenue +52.2% y/y to $1.81 bln).

09:02AM ET
Applied Materials trades lower on JulQ results/guidance; foundries cut capital spending

Applied Materials (AMAT), the semiconductor equipment giant, is trading lower (-4%) after reporting Q3 (Jul) earnings/guidance last night. In terms of quick background, AMAT is a supplier of manufacturing equipment, services and software to the semiconductor, display and related industries. Its products improve device performance, yield and cost. AMAT's customers include manufacturers of semiconductors, liquid crystal and OLED displays, and other electronic devices. AMAT operates in three reportable segments: Semiconductor Systems (65% of FY17 revenue), Applied Global Services (21%) and Display and Adjacent Markets (13%).

Its Semiconductor Systems segment sells a wide range of manufacturing equipment used to fabricate semiconductor chips. This includes semiconductor capital equipment used for many steps of the chip making process including the transfer of patterns into device structures, transistor and interconnect fabrication, metrology, inspection and review, and packaging.

Its AGS segment provides services to optimize equipment and fab productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software. And finally, its Display and Adjacent Markets segment sells products for manufacturing LCDs, OLEDs, and other display technologies for TVs, PCs, tablets, smart phones etc.

When you look at the company as a whole, about 40% of revenue now comes from sources other than new semiconductor equipment sales. AMAT's services, spares, upgrades, consulting, software, display, and flexible technology businesses will generate more than $7 bln of revenue this year. In Display, AMAT has scaled its business from about $600 mln in 2012 to $2.5 bln in 2018. In Service, it has grown at a 15% CAGR since 2014 and it expects to sustain at least that pace of growth. So you can see, AMAT is more than just new equipment sales.

Also, AMAT sees its most exciting days ahead. Over the next decade, AI and Big Data will transform almost every sector of the economy and be a major growth driver for electronics and semiconductors because it requires new types of computing at the edge and in the cloud, lower cost, lower power chips, and abundant storage.

Turning to the Q3 (Jul) results, non-GAAP EPS jumped 40% YoY to $1.20, which was on the higher end of prior guidance of $1.13-1.21. Revenue rose 19.3% year/year to $4.47 bln, which also was on the higher end of prior guidance of $4.33-4.53 bln. In terms of guidance for Q4 (Oct), AMAT expects non-GAAP EPS of $0.92-1.00 and revenue of $3.85-4.15 bln. The OctQ revenue and EPS guidance were well below market expectations.

On the call, AMAT said that, in aggregate, it sees ongoing strength in its markets. Customers are making rational investments in new capacity, resulting in well-balanced supply/demand dynamics. At the same time, they are spending at healthy levels for next-generation technologies. Demand for wafer fab equipment is on track to be an all-time record in 2018 and AMAT's view of 2019 remains positive. Its thesis that spending in 2018 plus 2019 combined will exceed $100 bln remains firmly intact.

However, foundry customers have trimmed their capital spending plans for the year. They are still pushing forward with prioritizing investments towards long lead-time equipment, which is a positive leading indicator for 2019. NAND bit demand is expected to grow at about 40% this year, with bit supply growing slightly faster. As a result, AMAT sees spending levels flat to modestly down from last year's record levels. DRAM investments are strong, up approximately 50% YoY. Capital investments by cloud service providers continues to strengthen, up about 85% YTD.

Looking at the broader context, 2018 shows how the industry has fundamentally changed over the past five years. More diverse demand drivers spanning consumer and enterprise markets, combined with very disciplined investment, has reduced cyclicality. AMAT says it's not seeing the large fluctuations in wafer fab equipment spending that it did in the past.

In sum, the JulQ results were good, it's the guidance that is causing weakness in the stock today. The main reason seems to be foundries cutting back on capital spending in 2018 although AMAT sounds a bit more optimistic about 2019. On the positive side, the stock is not down that much despite what was a fairly large downside guidance outlook for OctQ. Part of that is because some pessimism was probably already built into the stock price heading into this JulQ report. The stock has been trending lower since its March 2018 high of $62.40 and it traded lower on AprQ results in May. That tells us investors had been bracing for weak guidance for OctQ, so it's not a huge surprise.

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