Looking Ahead: August 31, 2015
The capital markets will have something to talk about over the weekend and to trade with come Monday. That "something" is the speech on inflation developments that Federal Reserve Vice Chairman Stanley Fischer will be giving on Saturday at the Kansas City Federal Reserve Economic Symposium in Jackson Hole, Wyoming.
Gamestop trades lower despite strong Q2 results
Gamestop (GME 43.70, -2.50) is trading roughly 5.4% lower in afternoon trade despite the company's better than expected second quarter print. For the period, GME saw earnings per share (EPS) of $0.31 on revenues which rose 1.8% year-over-year to $1.76 billion.
In terms of the results, GME also reported strong consolidated global comparable store sales of +8.1% versus the company's guidance of +0-3%. In the video game segment, GME saw new hardware sales decline 2.2% to $324.9 million, while new software sales also declined to the tune of 6.0%. Pre-owned sales increased slightly by 0.5% to $560.8 million driven by acceleration in next-gen sales as PS4 and Xbox One trades and inventory become a larger part of the overall pre-owned mix.
Mobile and Consumer Electronics were strong in Q2, up 26.9% to $142.2 million, driven by a 62.3% increase in Technology Brands revenues. Video game accessories also performed strong for GME, increasing 6.2% in the period to $125.8 million.
Earnings were helped along by the nearly 110 basis point increase in margins, primarily due to the Mobile and Other category gains (Mobile sales were up 26.9% year-over-year, Other sales were up 37.7%).
In terms of guidance, GME issued largely tame guidance for the coming period. In Q3, GME sees in-line EPS of $0.53-0.60 on comps of +1-4%. For the FY16 period, GME sees EPS of $3.66-3.86, up from prior $3.63-3.83 on comps of +2-7% up from +1-6%.
In spite of the better than expected results, GME is trading down today, as is the broader market (S&P 500 1986.79, -0.87). However, GME might be trading down today more as an overall view by investors of the long-term prosperity of the video game and electronics areas. Even so, those areas still performed well this period, so it's difficult to say which holds more weight in investors' minds today.
After initially trading higher at the open, Splunk (SPLK) is trading modestly lower this morning after reporting better than expected 2Q16 (July) results and providing upside guidance.
If you're not familiar with the company, SPLK is one of the premier Big Data plays. In essence, SPLK's software allows its 10,000+ enterprise customers to index the massive amounts of structured and unstructured machine data that they generate from their network. Once indexed, it allows the customer to monitor, analyze, and generally make sense of it. SPLK management has said that the majority of their sales can be attributed to security use (monitoring & reporting unusual events), but there is a wide range of potential uses beyond that, including improving IT efficiency, improving application performance, analyzing customer patterns, general business analytics, etc.
The company's flagship product is Splunk Enterprise, but over the years the company has been steadily adding products such as Splunk Cloud, Splunk Light, Hunk (for analyzing data in Hadoop environments), and Splunk Mint, as well as other more specialized apps. Originally, SPLK operated on a volume pricing model, where they charged customers based on the amount of data indexed per day. The knock against this pricing model was that while fees were very moderate at first during the initial uptake period, when the customer started using Splunk across multiple departments or across the enterprise, the fees ramped significantly. In early 2014 SPLK acknowledged this potential hurdle by adding new pricing tiers that were similar to Amazon Web Services' fee structure, which regularly reduced prices in order to drive more volume.
SPLK has established itself as the leader in this large, fast-growing market, which can be seen in the company's impressive double-digit top-line growth rates. To take advantage of this opportunity, management has been investing heavily in building out its sales and marketing, which had resulted in a consistent stream of small quarterly EPS losses. However, SPLK is now right on the cusp of profitability and is expected to report its first annual profit ever this year.
Turning back to last night's Q2 results, sales grew +46% to $148.3 million while EPS rose +200% to $0.03. Both numbers were ahead of expectations. The company signed up more than 500 new customers, bringing their total customer count above 10,000. Gross margin ticked down to 88% from 90% in the year-ago quarter due to increased expenses resulting from the ramp-up of their cloud products. However, operating margin rose to 3% from 1% in the year-ago period.
In terms of guidance, the company issued Q3 (October) and FY16 (January) revenue guidance above expectations.
Halcon Resources Rallies 16% Following Debt Swap
Oil and gas play Halcon Resources (HK 1.17 +0.16) is getting a big
boost today after announced that it has
entered into privately negotiated exchange agreements with certain holders of
its outstanding unsecured debt securities as part of its efforts to deleverage
the Company's balance sheet.
Halcon is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich assets in the United States. This morning, Halcn has agreed to issue approximately $1.02 billion aggregate principal amount of new 13.00% Third Lien Senior Secured Notes due 2022 (the "New Notes") in exchange for approximately $1.57 billion aggregate principal amount of its outstanding unsecured debt securities (the "Existing Notes") as follows:
As the company said, "Not only do these exchanges result in a material reduction to our long-term debt, they also effectively improve our leverage profile by almost a full turn and reduce our annual cash interest expense by approximately $12 million. We remain steadfast in our mission to continue improving our balance sheet and are confident we will emerge from this downturn a much stronger company."
And actions like this are key given the collapse in crude oil prices. Following the collapse, some bankruptcies and job reduction were immediately expected, so it's nice to see oil and gas companies actively take action to stay in shape.
Zoe's Kitchen (ZOES), which made its IPO debut in April 2014, is trading 2% lower this morning after reporting Q2 earnings last night.
In case you're not familiar, Zoe's Kitchen is a fast growing, fast casual restaurant chain serving Mediterranean-inspired dishes delivered with Southern hospitality. It basically is trying to bring Mediterranean cuisine to the masses in a fast casual concept (Think Panera but for Mediterranean food).
Management likes to say it serves "real food" -- from hummus, made fresh daily and served with warm pita bread, to flavorful salads and kabobs. By real food, ZOES means food made from simple ingredients, such as raw vegetables, fruits and legumes. ZOES says it focuses on providing simple, tasty and fresh Mediterranean meals, inspired by family recipes, and made from scratch daily. There are no microwaves or fryers in its restaurants.
ZOES is growing strongly as it ended 2013 with 102 restaurants and is already up to 158 locations. In 2015, the company plans to open 31-33 restaurants. The goal is to double its restaurant base in the next four years. ZOES believes it's in the early stages of its growth trajectory as they see a long term total restaurant potential in the US in excess of 1,600 locations.
Turning to the Q2 results, non-GAAP EPS improved to $0.05 from $0.04 last year. Revenue rose 30.1% year/year to $54.5 mln. Both EPS and revenue were slightly above expectations. In terms of guidance, ZOES slightly raised full year expectations. They now expect FY15 revenue of $220-224 mln vs prior guidance of $218-223 mln. ZOES continues to expect to open 31-33 company-owned restaurants this year.
Restaurant contribution margin increased 10 basis points to 21.3% as the company benefited from lower commodity prices, which were partially offset by an increase in store operating expenses. A shift in the timing of the company's annual general managers conference and higher repair and maintenance expenses impacted margins in the quarter.
In sum, it was a decent but not great quarter. Same store sales were good at +5.6%, but not as impressive as the robust +7.7% posted in Q1. Also, the company posted a large EPS eat in Q1 and this time it was only a slight beat so maybe expectations were a bit higher than they should have been.
From a broader perspective and despite today's weakness, Zoe's Kitchen is an emerging restaurant chain worth a look. For one thing, it has more of a unique concept. Rather than just another burger joint, ZOES is really the first chain to bring Mediterranean food to the quick service channel on a national basis. It's pretty unique. They are still mostly based in the southern US but they are moving northward. There are going to be bumps in the road but if you're looking for an early stage restaurant growth concept, it's a name to consider.
Drybulk Shipping Rates Fall For A Ninth Consecutive Session
Freeport-McMoRan Pops on Report of Icahn Stake
Natural resources company Freeport-McMoRan (FCX 10.19) soared 29% on Thursday on some short-covering activity that followed the company's announcement that it will be cutting costs by slashing capital expenditures next year. The good times kept rolling for FCX after the close when it was reported that Carl Icahn, and various investment partnerships overseen by him, recently acquired an 8.46% stake in the company, making Icahn the company's largest shareholder.
The acquisition of FCX stock, which includes shares underlying forward contracts, amounts to 88,000,000 million shares. The 13D filing reporting the position indicates the accumulation of the stock occurred in a period spanning from July 17 to August 21.
The filing also indicates that the stock was acquired on the belief the shares are undervalued and that the reporting persons intend to have discussions with Freeport-McMoRan's management relating to the company's capital expenditures, executive compensation practices and capital structure, as well as the curtailment of the company's high-cost production operations. In addition, it was stipulated that the reporting persons may seek board representation.
Basically, the filing is a shot across management's bow that Mr. Icahn intends to shake things up to bolster the value of the company's stock, which has plummeted more than 80% from its 2008 high, with a significant portion of that decline coming in the last 13 months amid the rout in commodity prices.
Freeport-McMoRan kindly acknowledged Mr. Icahn's stake, saying it "...welcomes constructive input toward our common goal of enhancing shareholder value."
Mr. Icahn had not yet held any discussions with management or the the company's board of directors as of August 26, yet those discussions will certainly be had.
Investors appear to like the implications of Mr. Icahn's activist involvement. Shares of FCX are trading 17% higher to $11.94 in pre-market action. On Wednesday the stock closed at $7.92.