Weekend Update #142

Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

“Navigating by the stars under cloudy skies” summed up Fed Chair Powell’s Jackson Hole speech last Friday. Mr. Powell cited progress on inflation but reiterated the central bank’s willingness to tighten further if such action was warranted depending on incoming data. Markets interpreted this to mean the Fed was done tightening for now until further notice, prompting a rally in equity markets. The Conference Board’s latest Consumer Confidence reading came in at 106.1, below the expected 116.0 figure. The highly-anticipated employment data this week began with ADP’s Employment Change report which indicated 177K jobs were added in August, below the expected 195K. On Friday the Bureau of Labor Statistics’ Change in Nonfarm Payrolls seemed to corroborate the ADP report with its own +170K increase, which fell short of the +187K estimate. Not all economic data was weak, though, as second quarter GDP clocked in at +2.1%, and headline and core CPE came in at +3.3% and +4.2%, respectively, which was in line with expectations and indicated that the Fed may still have work to do with regards to inflation.

On the earnings front, Best Buy appears to have staved off steep sales declines after beating Q2 analyst and earnings estimates; however, CEO Corie Barry said the company anticipates this year will be “the low point in tech demand.” Salesforce shares popped after reporting adjusted earnings, revenue and updated guidance that beat expectations. Elsewhere in markets, Amazon and Shopify announced a partnership whereby Buy with Prime would be enabled among Shopify merchants and provide them access to Amazon’s Prime customer base and fulfillment network. Meanwhile, payment processing networks Visa and Mastercard announced they would be raising their credit-card fees.

You can find this and more in this week’s Blue Room Newsletter.

Weekly Performance

S&P 500 4,582.23 +1.01%

Dow Jones 34,459.29 +0.66%

Nasdaq 15,750.93 +2.11%

Key Economic Readings Next Week

Monday, September 4 — Labor Day

Tuesday, September 5 — Factory and Durable Goods Orders

Wednesday, September 6 — S&P Global PMI; ISM Services Index

Thursday, September 7 — Nonfarm Productivity

Friday, September 8 — Wholesale Inventories; Consumer Credit

Thank you Blue Room Team Leader OMAR GUZMAN

Earnings Summary

Conagra Brands, one of North America’s leading branded food companies, which owns such iconic brands as Birds Eye, Duncan Hines, Healthy Choice, Marie Callender’s, Reddi-wip and Slim Jim, reported its Fourth Quarter Fiscal Year 2023 earnings on July 13, 2023. Its recent stock performance—a decline of 27.7% from January 8, 2023 to August 23, 2023—and subsequent increasingly attractive dividend yield of 4.6% prompted us to “look under the hood” and see if Conagra doesn’t in fact present a potential investment opportunity.

Shares of Conagra (ticker: CAG) recently traded at $30.28. At 477.9 million shares outstanding, that yields a market capitalization of $14,469.8 million. Conagra has $93.9 million of cash & equivalents, $70.5 million of minority interest, and a staggering $9,467.6 million of total debt, giving it a total enterprise value of $23,914.0 million. The debt load, comprising 39.5% of enterprise value, is something to keep in mind, but 88% of it is fixed rate. Management stated they are working to address the remaining 12% that is variable and currently sitting at 6% interest. Continuing to chip away at this would have a positive effect on the company’s free cash flow.

In fiscal year 2023 Conagra managed to grow revenues by 6.4% year-over-year—a function of a 7.5% decline in volumes offset by a 14.1% increase in price and mix. Despite operating in an inflationary environment, the company apparently has managed to relatively successfully pass on price increases, generating 198 basis points of gross margin expansion, from 24.6% in FY 2022 to 26.6% in FY 2023, aided in part by the net sales increases as well as savings from productivity improvements. However operating margin suffered, declining 291 basis points from 11.7% to 8.8% in that same time period, owing largely to significant brand impairment charges caused in part by elevated interest rates.

Despite moderations in revenue growth across all of its business segments— Grocery & Snacks, Refrigerated & Frozen, International and Foodservice—the company has managed to increase adjusted operating profit by 125 basis points, growing it from 14.4% to 15.6% from FY ‘22 to FY ‘23.

Conagra acknowledged it is seeing shifts in consumer behavior, deflation in some categories, and declining income from its Ardent Mills joint venture, but it is seeing green shoots as supply chain disruptions subside, its productivity program expands, and its innovation slate comes online. In light of a mixed bag of competing puts and takes, it may be that the good might outweigh the bad as the company “regains its footing” and begins operating in a more normalized environment going forward.

IN

AMBARELLA INC., SECOND QUARTER FINANCIAL RESULTS

SANTA CLARA, Calif., Aug. 29, 2023 (GLOBE NEWSWIRE) -- Ambarella, Inc. (NASDAQ: AMBA), an edge AI semiconductor company, today announced financial results for its second quarter of fiscal year 2024 ended July 31, 2023.

Revenue for the second quarter of fiscal 2024 was $62.1 million, down 23% from $80.9 million in the same period in fiscal 2023. For the six months ended July 31, 2023, revenue was $124.3 million, down 27% from $171.2 million for the six months ended July 31, 2022.

Gross margin under U.S. generally accepted accounting principles (GAAP) for the second quarter of fiscal 2024 was 61.9%, compared with 63.1% for the same period in fiscal 2023. For the six months ended July 31, 2023, GAAP gross margin was 61.1%, compared with 62.9% for the six months ended July 31, 2022.

GAAP net loss for the second quarter of fiscal 2024 was $31.2 million, or loss per diluted ordinary share of $0.79, compared with GAAP net loss of $23.7 million, or loss per diluted ordinary share of $0.62, for the same period in fiscal 2023. GAAP net loss for the six months ended July 31, 2023 was $67.1 million, or loss per diluted ordinary share of $1.70. This compares with GAAP net loss of $34.5 million, or loss per diluted ordinary share of $0.91, for the six months ended July 31, 2022.

Financial results on a non-GAAP basis for the second quarter of fiscal 2024 are as follows:

Gross margin on a non-GAAP basis for the second quarter of fiscal 2024 was 64.6%, compared with 64.5% for the same period in fiscal 2023. For the six months ended July 31, 2023, non-GAAP gross margin was 63.8%, compared with 64.2% for the six months ended July 31, 2022.

Non-GAAP net loss for the second quarter of fiscal 2024 was $6.0 million, or loss per diluted ordinary share of $0.15. This compares with non-GAAP net income of $7.6 million, or earnings per diluted ordinary share of $0.20, for the same period in fiscal 2023. Non-GAAP net loss for the six months ended July 31, 2023 was $12.1 million, loss per diluted ordinary share of $-0.31. This compares with non-GAAP net income of $24.7 million, or earning per diluted ordinary share of $0.63, for the six months ended July 31, 2022.

IN

Recent Highlights in Large Market Ophthalmology Portfolio

Rapidly advanced 4D-150 in wet AMD

Presented positive interim data from Dose Exploration stage with three dose cohorts (3E10, 1E10, and 6E9 vg/eye; n=5 each) at ARVO and ASRS 2023 Annual Meetings (data as of July 3, 2023):

Well-tolerated with no Grade ≥1 inflammatory cells, no vasculitis, and no hypotony
Dose response demonstrated in favor of high dose 3E10 vg/eye, including 100% reduction in supplemental anti-VEGF injections in 4 evaluable patients and reduction in mean central subfield thickness (CST) reduction at 36 weeks of follow-up
Durable response beyond 1 year in 3E10 vg/eye dose cohort, with 3 of 4 evaluable patients injection-free at up to 80 weeks of follow-up
Completed target enrollment of 50 patients in the randomized Phase 2 Dose Exploration stage of the PRISM clinical trial in July, nearly two quarters ahead of initial projections

In April, acquired the rights and know-how for short-form complement factor H (sCFH) from Aevitas and announced sCFH as payload for 4D-175 product candidate for geographic atrophy (GA)

IN

From any point on Earth, we all see the same moon phase, meaning, though with different lighting, we all had the opportunity to enjoy the beauty of the blue moon that took place on Wednesday, August 30, 2023. To understand what this means, I sought to understand both what makes the moon on this day “blue,” as well as what makes it extraordinary.

The typical moon cycle is approximately 29.5 days, meaning that roughly every 2.5 years, there is a 13th full moon within a calendar year. It’s referred to as a blue moon for its rarity and lack of alignment with the standard naming scheme of lunar phases, according to many cultures, though it does not typically boast a blue hue. Rather, the name came from a 19th century expression referring to circumstances of extreme rarity.

The phrase “once in a blue moon” can mean just about anything; for those astrologically inclined, the blue moon in Pisces brings about heightened emotion and intuition, posing an opportunity to connect with our most outrageous hopes and chase far-fetched dreams. For many others this Wednesday, it literally meant taking a moment away from routine, to step outside, test the limits of a smartphone camera, and notice the ease with which they could see their loved ones and neighbors enjoying the same moonlight.

For Blue Room Creative Director Emily, the brightness of the moon brought a new perspective. She said, “At 7:39 in Denver I saw so much engagement around the neighborhood outdoors I had never noticed or thought of before — little children playing with their parents in the park after dinner, elementary school aged boys climbing the stairs of the observatory on an imaginary adventure, A LOT of dog bonding… it was really cool to think how vibrant my immediate community was.”

It is not often that so many of us take the same moment to breathe, take in some aspect of the world around us, and experience something individual. This makes this blue moon special, regardless of if taking it all in meant looking up at a brightly lit sky with seemingly improved night vision, opening up to new spiritual beginnings, or taking note of something else entirely unique to each of us.

source one source two source three

+ + THANK YOU EVERYONE+ +

for sending your stunning perspectives of the Blue Moon

In the spirit of the

— SUPER BLUE ROOM —

let's take a look back with our . . .
Blue Room Time Machine:

— CONGRATULATIONS —

TO OUR PARTNER, CHEF KELLY WHITAKER + ID EST HOSPITALITY + BASTA

RESERVE YOUR TABLE

EDUARDO SARABIA

Prologue
5 September — 22 October 2023

PRIVATE VIEW

Friday 15 September, 5-7:30pm

Maureen Paley

60 Three Colts Lane

London E2 6GQ

Studio M will be open 11-6pm only

Opening Reception

8-10pm

Rochelle School Hall

with drinks and food by Rochelle Canteen

Marueen Paley | London

Overview

Lululemon continues to outperform on topline results, beating current quarter consensus estimates by ~1.72% ($2.21 billion actual versus $2.17 expected), as well as meeting third quarter consensus revenue at $2.178 billion. Earnings are expected to get a boost this year as freight expense will add around 210 bps of gross margin.

In the United States, sales accounted for 65.0% of net revenue versus 68.0% in the same quarter a year ago. Comparable store sales, by our measure, increased only 3.0% versus 9.0% last quarter, and 23.4% last year. If we include the company’s guidance in terms of store growth and revenue growth, comparable store sales may turn negative in 4Q of this year and grow approximately 2.6% for the full year. This compares to 22.6% growth in the fourth quarter of last year and 20.5% growth for FY22.

In women’s, the 16% increase in sales was led by new product introductions in Scuba (light breathable sweatwear), Define (slim fitting outerwear), Dance Studio Jogger (airy pants and dance clothing), as well as Tennis and Golf. In Men’s, the ABC family of athletic slacks continue to be the flagship product, bringing in new guests and acquiring a larger share of wallet for existing customers. Accessories growth is outpacing all other categories, growing 40% year on year, indicating strong unit volumes relative to the Men’s and women’s categories, likely a function of the ASP being much more digestible for the average consumer.

China revenue continues to be strong with comparable store sales growth of 60.04%, despite the economic headlines indicating less-than-anticipated growth in the region. The company has opened 72 net new stores since last year and has effectively grown same store sales by 23% (non-constant currency). In the first quarter, comparable sales in China grew 30.0%, so 7 point deceleration in this metric quarter over quarter.

IN

Key Conference Takeaways:

As Trimble leans even further into subscription offerings and recurring revenue, annualized recurring revenue (ARR) rose 14% year-over-year to $1.88 billion in Q2 2023
The Buildings & Infrastructure segment is just starting to benefit from the U.S. Infrastructure Bill projects and will have momentum behind it going into 2024
Europe also have infrastructure projects starting that were delayed during COVID-19
Mega projects, nuclear projects, manufacturing reshoring, EVs, battery plants, data centers, and renewable projects are all tailwinds for B&I
Trimble Construction One will be driven by cross-sell and upsell into the future with 1/3 of bookings in the quarter coming from cross-sell — hundreds of millions of dollars in upsell opportunity
Agriculture is seeing weakness within the Resource & Utilities segment where aftermarket sales were down
Trimble already works with over 100 OEMs in agriculture, many of which are looking to vertically integrate more of the technology stack themselves
Trimble is adapting to the changing ag landscape by shifting from guidance offerings to implements offerings, especially variable rate spraying application
In 2022, Transporeon managed over 25 million transports, over $48 billion in freight, over 150,000 carriers, and over 1,400 shippers
Transporeon’s real growth opportunity will be North American expansion as sales are already 85% Europe
Internally, Trimble reported 30% increases in productivity of software engineers using generative AI tools to code projects

IN

BOX Q2 FY24 Operating Results & Guidance

Q2 FY2024 Results:

Total revenues $261.4 million, +6% YoY

1697 total customers paying over $100K annually, +11% YoY

RPO $1.138 billion, +8% YoY
Non-GAAP Gross profit $201.1 million, +7% YoY, representing 76.9% gross margin
Non-GAAP Operating income $64.7 million, +21% YoY, representing 24.8% operating margin
Non-GAAP diluted EPS $0.36, +29% YoY
Free cash flows $20.6 million, +15% YoY
Cash, cash equivalents, and marketable securities: $445 million as of July 31, 2023

IN

Despite a litany of tenuous data releases this month, August saw oil prices retain their strength – reflecting the continued strain on the global balance of supply and demand. From an aggregate level, it appeared that economic data this month was more pessimistic than many market participants would have hoped. Europe continues to show signs of weakness, especially in Germany – the beating heart of European growth. Chinese economic strength was seriously called into question following concerns around Country Garden and a reluctance of markets to believe in any material benefit to proposals surrounding economic and market stimulus on the part of the CCP. Indeed, in the United States, the soft landing debate rages in full force, with many economic forecasters expecting the slowdown to finally take place sometime soon. Nonetheless, despite the overwhelming sense of dark storm clouds forming over the global economy, crude oil prices managed to eek out a gain for the month of August.

In the second week of August, the trio of OPEC, the IEA and the EIA released their updated guidance for the global balance of supply and demand. All three energy forecasts emphasized the same point: oil demand is expected to grow precipitously over the course of the next 18 months. Beginning with the OPEC Monthly Oil Market Report (MOMR), the consortium maintained their expectation for oil growth through the rest of the year – leaving their 2023 estimate of global consumption of 102.00 barrels per day unchanged. Indeed, despite mildly adjusting downward their estimate for the second quarter, the forecasters increased their consumption estimates slightly through the remainder of the year – largely on the back of China and India who are expected to see 6.19% and 4.69% increases in crude oil consumption compared to 2022 levels, respectively.

IN

Earnings Call Content Summary

WDAY stock surges due to solid quarter results with subscription revenue growth of 18.8%, 24-month backlog growth of 22.7%, and non-GAAP operating margin of 23.6%. Following the momentum of the first half of the year, WDAY increase their full-year FY '24 performance expectation. The growth of revenue in FY’24 is expected to be 16% and non-GAAP operating margin is improved to 23.5%. With the unique approach to investment in AI and ML, WDAY expect AI to open up new market opportunities for long-term growth while expanding margins.

Some highlights from guidance upgrades include:

FY’24 Total revenue of $7,200 - 7,240M, up from $7,180 - 7,225M
FY’24 subscription revenue of $6,750 - 6,590M, up from $6,550 - 6,575M
FY’24 Non-GAAP OPM of 23.5%, up from 23.0%

Q2 FY’24 got positive GAAP operating income of 36 million, representing 2.0% margin. In Q3 and FY’24, WDAY expected GAAP OPM ~20-22 points lower than Non-GAAP OPM, representing a positive of 1.5 - 3.5% GAAP OPM.

With the positive outlook from the recent BWG report on WDAY, I expect that total revenue growth of 16.7% FY’25 and 17.0% FY’26, Non-GAAP OPM improvement of 24.4% FY’25 and 26.2% FY’26

IN

Domestic Segment Q2 FY24 Results

Domestic Revenue

Domestic revenue of $8.89 billion decreased -7.1% versus last year primarily driven by a comparable sales decline of 6.3%.

From a merchandising perspective, the largest drivers of the comparable sales decline on a weighted basis were appliances, home theater, computing and mobile phones. These drivers were partially offset by growth in gaming.

Domestic online revenue of $2.76 billion decreased -7.1% on a comparable basis, and as a percentage of total Domestic revenue, online revenue was flat to last year at 31.0%.

Domestic Gross Profit Rate

Domestic gross profit rate was 23.1% versus 22.0% last year. The higher gross profit rate was primarily due to: (1) favorable product margin rates; (2) improved financial performance from the company’s membership offerings, which included higher services margin rates and reduced costs associated with program changes made to the company’s free membership offering; and (3) an improved gross profit rate from the company’s Health initiatives.

Domestic Selling, General and Administrative Expenses (“SG&A”)

Domestic GAAP SG&A was $1.73 billion, or 19.5% of revenue, versus $1.73 billion, or 18.1% of revenue, last year. On a non-GAAP basis, SG&A was $1.71 billion, or 19.2% of revenue, versus $1.71 billion, or 17.9% of revenue, last year. Both GAAP and non-GAAP SG&A were approximately flat to last year, as higher incentive compensation was primarily offset by reduced store payroll expense.

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These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor.

This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.

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