Facts from the Week: July 10, 2022
Highlights from $MA $COST $BKE $NKE $GIS $BBBY $DRI $JWN $KSS $HELE $INVH $RH $MNK $MU $META $JEF $MKTX $CBOE
Consumer
Mastercard - MA
As inflation persists, consumers are paying more for essentials. Two of the categories that have higher inflation have seen a lift in sales: June sales for Fuel & Convenience are up +42.1% YOY/ +55.7% YO3Y and Grocery +14% YOY/ +24.8% YO3Y.
Meanwhile, discretionary spending continued to drive growth across the fashion-forward sectors in June, including Jewelry +16.2% YOY/ +86.6% YO3Y, Luxury +4%/ +54% YO3Y and Department Stores +8.6% YOY/ +21.4% YO3Y. And with summer in full swing, consumers continue to spend on travel experiences: Airline and Lodging are both up +18.2% YOY/ +7.3% YO3Y and +33.7% YOY/ 30.4% YO3Y, respectively.
Costco - COST - June sales results:
sales up 20% yoy, up 56% vs 2019
US comps ex gas/fx up 13.2% with 3pt benefit from extra day; 3-year comp up 38.6%
Traffic up 10% worldwide, up 9% in US
transactions up 7.2%
gas price up 57% yoy
June inflation consistent with May, fresh foods lower
The Buckle - BKE- June sales results:
Nike - NKE
In the first quarter, we expect real dollar revenue growth to be flat to slightly up versus the prior year due to COVID disruption in Greater China and more than 500 basis points impact from foreign exchange translation. We expect gross margins to be in the range of flat to declining by 50 basis points versus the prior year with a wider-than-usual range reflecting our consideration of a number of scenarios.
We expect to benefit from mid-single-digit pricing actions and continued gains from our shift to a more direct business, offset by another 100 basis points headwind from elevated ocean freight costs, increased product costs, discrete supply chain investments and normalization of historically low markdown rates. We expect foreign exchange to be a 30 basis point headwind on gross margin due to strength in the U.S. dollar, largely offset in fiscal '23 by favorable hedge rates versus current spot rates.
Watches of Switzerland
US sales of £428 million were +48% on last year. Luxury watch sales growth was +43% on the prior year, this significant growth was very broad based with all brands performing excellently. Luxury jewellery growth has also been impressive at +130%, boosted by the strong market, the relaunch of our luxury jewellery in our Mayors showrooms, the acquisition of Betteridge and the opening of a BVLGARI mono-brand boutique.
General Mills - GIS
Bed Bath Beyond - BBBY
In the quarter there was an acute shift in customer sentiment and, since then, pressures have materially escalated. This includes steep inflation and fluctuations in purchasing patterns, leading to significant dislocation in our sales and inventory that we will be working to actively resolve.
Darden - DRI
Finally, turning to our financial outlook for fiscal 2023. We expect total sales of $10.2 billion to $10.4 billion, representing growth of 6% to 8% from last year; same restaurant sales growth of 4% to 6% and 55 to 60 new restaurants; capital spending of $500 million to $550 million; total inflation of approximately 6%, and we plan to continue underpricing total inflation with annual pricing of approximately 5%.
Furthermore, we expect commodities inflation of approximately 7% that's heavily weighted in the first half of the year; hourly labor inflation of approximately 8%; an annual effective tax rate of approximately 13.5%; and approximately 124 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $7.40 and $8.
Heading into 2023, we expect the commodities inflation rate to increase in the first quarter from the 12% we had in Q4 and then to moderate significantly, ending the year roughly flat.
I want to talk about the trends throughout the quarter. And if you think about our comps throughout the quarter, they stayed strong, and they actually continue to build from March, April to May. But the industry actually started to see some declines from March, April to May in same-restaurant sales.
Nordstrom - JWN
Core categories remain healthy, especially as customers begin returning to offices, travel and events
"We're seeing a healthy customer. And look, our strongest areas really are our key core areas, women's apparel, men's apparel, shoes, designer. And designer has been strong for several years now and it continues to be. We do not see any evidence in our business of the customer trading down. It's quite the opposite." –Erik Nordstrom
Kohl’s - KSS
The Company is providing the following update on second quarter business trends related to macroeconomic issues. As inflationary pressures on the consumer continue, the Company is seeing a softening in consumer spending and now expects sales to be down high-single digits for Q2, as compared to our prior expectations of down low-single digits relative to last year.
Adjusted NICS Background Checks for June
June was an increase of 8.1% over June 2021, when the number was 1,279,300. That made June 2022 the second-strongest month on record for background checks, surpassed only by June 2020, when concerns were higher about crime, the election, and attacks on police.
Helen of Troy - HELE
“Since our April earnings release, the macroeconomic outlook has changed signicantly as consumers shift their buying patterns and adapt to a number of factors including the impact of inflation and interest rates rising more rapidly than expected. In response, many of our major retail customers announced actions to rebalance their inventory stemming from rapid revisions to their sales forecasts. We have lowered our sales and EPS outlooks for scal 2023, reecting our current assessment of the impact of these new headwinds on our business.
Hydro Flask is crushing it. Hydro Flask is gaining share, gaining share over the last 52 weeks. The category is growing. People are returning to in-person schooling, although the school year happens to be out right now, but not during the quarter, the quarter that we just had was a school period of time, it's summer time now, people are big on all kinds of activities. Outdoor is big. Experiences are big. Osprey is doing well as a result, same story. And then the category itself is just up.
Inventory:
Nike: NIKE-owned inventory grew 30% versus the prior year, with extended lead times causing in-transit inventory to be 65% of our total inventory at the end of the quarter.
BBBY: During Q1, the arrival of delayed unit receipts with long lead times was met with sharply lower demand. This led to higher inventory of approximately 15% versus last year, while at the same time, sales were 25% lower. This delta of almost 40 percentage points between sales and inventory is worth more than $0.5 billion in cash. As exhibited by the inventory charge taken this quarter, we intend to work aggressively to clear the excess inventory that we and the industry now face.
HELE: Due to the assumptions of the impact of changing consumer demand and related higher levels of retail inventory reflected in our net sales outlook, we are working to strategically adjust our inventory purchasing trends to match our new expectation of retail and consumer demand. However, due to the fact that COVID-related supply chain disruptions have extended purchasing lead times, we expect that it will be more difficult to reduce our inventory levels at the same pace as previously anticipated. We, therefore, believe that we will end fiscal '23 with a leverage ratio in the range of 2.5x to 3x.
Housing
Freddie Mac - $FMCC
Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise. While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown.
Redfin - RDFN
The median home sale price was up 13% year over year to $396,000. This growth rate is down from the March peak of 16%.
The median asking price of newly listed homes increased 15% year over year to $399,973, but was down 2.1% from the all-time high set during the four-week period ending June 5.
The monthly mortgage payment on the median asking price home hit $2,342 at the current 5.3% mortgage rate, up 40% from $1,668 a year earlier, when mortgage rates were 2.9%. That’s down slightly from the peak of $2,487 reached during the four weeks ending June 12.
Pending home sales were down 13% year over year, the largest decline since May 2020.
New listings of homes for sale were down 1.4% from a year earlier.
For the week ending July 7, 30-year mortgage rates fell to 5.3%—the largest 1-week drop since 2008. This was down from a 2022 high of 5.81% but up from 3.11% at the start of the year.
Mortgage purchase applications were down 17% from a year earlier during the week ending July 1, while the seasonally-adjusted index was down 4% week over week.
Invitation Homes - INVH
The business really couldn't be running any better from a perspective of the last several years. We continue to see acceleration around rate, May over April, with our new lease rates approaching 16%, our renewals in the low double digits. We're blending close to almost 12% right now for the month of May. Occupancy continues to remain elevated at 98%.
We're learning a lot more about the customer as the portfolio matures and seasons. We're seeing customers stay with us longer and longer. We're seeing rent-to-income ratios of around 5.5x. That's much further ahead than where it was at our IPO, which was around 4.5x in 2017.
RH - RH
“The deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast, and we are updating our outlook, particularly for the second half of the year. With mortgage rates double last year’s levels, luxury home sales down 18% in the first quarter, and the Federal Reserve’s forecast for another 175 basis point increase to the Fed Funds Rate by year end, our expectation is that demand will continue to slow throughout the year.”” -CEO
Fiscal 2022 net revenue growth in the range of (2%) to (5%), with adjusted operating margin in the range of 21.0% to 22.0%. [NOTE: Pre-covid Adjusted operating margins were 14.3% in 2019 and 11.4% in 2018]
MillerKnoll - MNK
Retail is coming off a very strong fiscal year 2022 where we saw record orders and sales levels. Despite the strong performance for the full year, during the fourth quarter, order levels declined by 12% compared to last year as consumers shifted their spending to travel and other experiences and faced the uncertain economic environment. Despite these near-term pressures, new orders for the Retail segment were up 63% on a 2-year stack basis compared to the fourth quarter of fiscal 2020. And excluding the workplace category, which creates tougher comparisons given the pandemic-driven growth last year, the 2-year order growth for Retail was 77%.
Supply chain volatility continues but it has improved for us. So as we've seen our own lead times internally get back to normal levels, we're certainly encouraged by that. That's not to say we aren't seeing some suppliers experiencing their own supply chain issues, but we have seen on the whole much improved customer experience both on the contract and retail side.
Technology
Micron - MU
Our expectations for calendar 2022 industry bit demand growth have moderated since our last earnings call. Near the end of fiscal Q3, we saw a significant reduction in near-term industry bit demand, primarily attributable to end demand weakness in consumer markets, including PC and smartphone. These consumer markets have been impacted by the weakness in consumer spending in China, the Russia– Ukraine war, and rising inflation around the world. COVID-19 control measures in China have exacerbated supply chain challenges for some customers, and the macroeconomic environment is also creating some caution among certain customers. Several customers, primarily in PC and smartphone, are adjusting their inventories, and we expect these adjustments to take place mostly in the second half of calendar 2022. While end demand in the mobile, PC and consumer markets has weakened, cloud, networking, automotive and industrial markets are showing resilience. Due to weaker demand in the second half of calendar 2022, we now expect year-over-year calendar 2022 industry bit demand growth to be below the long-term CAGRs of mid-to-high-teens percentage for DRAM and high-20s percentage for NAND. Despite the near-term weakness, secular demand trends remain strong, and our view of long-term DRAM and NAND bit demand CAGR remains unchanged from prior expectations.
Meta Platforms - Meta
"If I had to bet, I'd say that this might be one of the worst downturns that we've seen in recent history," Zuckerberg told workers in a weekly employee Q&A session, audio of which was heard by Reuters.
Meta has reduced its target for hiring engineers in 2022 to around 6,000-7,000, down from an initial plan to hire about 10,000 new engineers, Zuckerberg said.
Financials
Jefferies - JEF
"Our second quarter results are reasonable in the face of an extremely challenging capital markets environment, with some markets being all but shut to new issues. We believe our market position continues to strengthen and we will reap the benefit of this as conditions normalize and the new issue market picks up. Our backlog is consistent with last quarter's strong levels but execution remains dependent on market conditions. Based on our ongoing dialogues with our clients, we believe that M&A and capital markets activity will pick up when stability and visibility improve.
Market Axess - MKTX
Labor
Indeed.com
When it comes to wage growth, rumors of its decline have been greatly exaggerated. The latest data suggest that wage growth for production workers is leveling off close to 6% and not dropping substantially. Workers are no longer seeing accelerating wages, which should reduce concerns about a wage-price spiral. But with inflation still high, workers are unlikely to see further gains in inflation-adjusted wages.
Freight
Freightos Baltic Index (FBX): Global Container Freight Index
Gas
Gasbuddy:
For the third straight week, the nation’s average gas price has declined, falling 10.4 cents from a week ago to $4.78 per gallon today according to GasBuddy data compiled from more than 11 million individual price reports covering over 150,000 gas stations across the country. The national average is down 7.1 cents from a month ago and $1.66 per gallon higher than a year ago. The national average price of diesel has fallen 6.3 cents in the last week and stands at $5.72 per gallon.
“As expected, and for the third straight week, average gasoline prices have fallen to their lowest level in over a month. The price of wholesale gasoline has plummeted, providing price relief as millions of Americans hit the road for the holiday weekend,” said Patrick De Haan, head of petroleum analysis at GasBuddy. “While we may see prices decline into this week, the drop could fade soon if oil prices reverse, especially with strong demand over the holiday. For the time being, Americans are spending nearly $100 million per day less on gasoline than when prices peaked a few weeks ago, and that’s well-needed relief at a time when gas prices remain near records.”