Weekend Update #156
Thank you for your continued support and engagement. 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.
Throughout the week, equity markets appeared uncertain in determining its trajectory as investors remained attentive to economic indicators and traded in anticipation of potential shifts in monetary policy. In the first half of the week, the S&P 500 fell as equity market participants speculated on the extent to which swaps markets overpriced potential rate. Conversely bond traders doubled down, predicting rate cuts by March and fully pricing in a cut by May 2024. By Tuesday, rates markets projected 125 bps of cuts in 2024, influenced in part by European money market sentiments and Moody's decision to downgrade China's sovereign debt, which turned Chinese equities lower. Wednesday's release of ADP Employment Change data showed that U.S. employers added 103,000 payrolls, well below economist’s estimates of 130,000 additions. Concurrently, US 10-year yields sustained their decline as rate traders continued to bet on the "Fed Put", given the weakening appearance of the labor market. Thursday marked the inflection in market sentiment as continuing claims data revealed a steeper decline than anticipated, suggesting the possibility of a controlled economic slowdown or a "soft landing." This sentiment shift laid the groundwork for Friday's positive market performance. The government's data on Friday revealed that Nonfarm Payrolls increased beyond economist estimates, prompting a rise in the S&P 500. While economists had estimated payrolls would grow by 185,000, the actual figure reported an increase of 195,000. In addition, the unemployment rate dropped to 3.7% from November's 3.9%, while the Labor Force Participation Rate increased to 62.8%. Consumer sentiment also blew out expectations, coming in at 69.4, much higher than the economist estimate of 62.0. In aggregate, the economic data this Friday suggested that the U.S. economy may be truly heading for a softlanding, as labor data, consumer sentiment, and inflation have all moved in the direction the Federal Reserve is targeting.
Additional company news this week:
Spotify cut 17% of headcount in an effort to approach profitability
TTWO released its first trailer for GTA VI and announced its plan to release the game in 2025. The stock fell as analysts wanted a specific date in 2025.
Robinhood gained after it reported that November crypto trading volumes grew 75% month over month.
Advanced Micro Devices Inc. officially presented the details of their Mi300 family of data center GPUs that claim performance above Nvidia’s H100 GPU in certain aspects of AI computing.
The UK’s antitrust department said that Microsoft should be subject to a full investigation regarding its acquisition of OpenAI
Weekly Performance
S&P 500 4,604.37 +0.21%
Dow Jones 33,127.28 +0.01%
Nasdaq 12,983.81 +0.69%
Key Economic Readouts This Week
Factory Orders (October) — Actual: -3.6% ; Estimate: -3.0; Prior: +2.8%
Durable Goods Orders (October) — Actual: -5.4% ; Estimate: -5.4%; Prior: -5.4%
ADP Employment Change (October) — Actual: +103k; Estimate: +130k; Prior: +106k
Initial Jobless Claims (December 2nd) — Actual: 220k; Estimate: 220k ; Prior: 219k
Continuing Claims (November 25th) — Actual: 1,861k; Estimate: 1,910k; Prior: 1,925k
BLS Change in Nonfarm Payrolls (November) — Actual: +199k; Estimate: +185k; Prior: +150k
Unemployment Rate (November) — Actual: 3.7%; Estimate: 3.9%; Prior: 3.9%
U. of Mich. Consumer Sentiment (December) — Actual: 69.4; Estimate: 62.0; Prior: 61.3
Thank you Blue Room Analyst Ian Carter
CONFERENCE SUMMARY
On Wednesday, December 6, Cava Group participated in the Morgan Stanley Global Consumer & Retail Conference. President, CEO and Co-Founder Brett Schulman was on the panel and was accompanied by Chief Financial Officer Tricia K. Tolivar. During the 40-minute or so appearance they fielded a series of questions from Brian Harbour of Morgan Stanley.
The pair talked a bit about Cava’s history, its acquisition of Zoe’s Kitchen and subsequent conversion of those restaurants. They explained the existence of unlocked value in that real estate, due in part to Zoe’s confusing brand proposition which reduced their ability to attract new customers and a menu expansion that “broke the kitchen,” and their intent to avoid those mistakes.
Cava mentioned that apart from delays from permitting and inspections, another gating factor to unit expansion is leadership—they’ve created a so-called farm system where they aim to develop and promote from within, but this also takes time. Separately, they’re experimenting with digital kitchen and hybrid kitchen formats—the former is dedicated to online orders and courier pick-ups, while the latter is a combination of an in-restaurant setting with an expanded back-of-house that supports online and catering orders. It doesn’t sound like they’ve found the right balance here yet, so ongoing trial-and-error in this regard will also take time, so any meaningful leverage, savings or efficiencies are yet to materialize.
Despite tailwinds on the revenue side owing to the burgeoning Mediterranean cuisine that is gaining traction in the United States as well as an evolving loyalty program, Cava still expects moderating restaurant-level margins resulting from wage increases, which will have a “100-basis-point to 120-basis point impact next year.”
All in all, Cava is certainly humming along, but it is still finding its way as far as restaurant-level margins go, as the effects of price increases and honeymoon-phase volumes subside and the company continues to grapple with macroeconomic uncertainty and the lagged effects of Fed rate hikes on the consumer
Consumer sentiment soared 13% to 69.4 in December — erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation. Sentiment is now above the all-time low measured in June of 2022 but still well below pre-pandemic levels.
All five index components rose this month, led by surges of over 24% for both the short and long-run outlook for business conditions. There was a broad consensus of improved sentiment across age, income, education, geography, and political identification.
A growing share of consumers — about 14% — spontaneously mentioned the potential impact of next year’s elections. Sentiment for these consumers appears to incorporate expectations that the elections will likely yield results favorable to the economy.
LULULEMON ATHLETICA ANNOUNCES THIRD QUARTER FISCAL 2023 RESULTS
Vancouver, British Columbia – December 7, 2023 – lululemon athletica inc. (NASDAQ:LULU) today announced financial results for the third quarter of fiscal 2023.
Calvin McDonald, Chief Executive Officer, stated:
"This was another strong quarter for lululemon as our innovative product offerings and community activations continued to powerfully resonate with our guests globally. As we enter the holiday season, we are pleased with our early performance and are well-positioned to deliver for our guests in the fourth quarter. I am energized by the significant opportunities ahead, and would like to thank our incredible teams around the world for their continued passion and commitment to our brand."
The adjusted non-GAAP financial measures below exclude certain inventory provisions, asset impairments, and restructuring costs recognized in relation to lululemon Studio, and the related income tax effects of these items.
For the third quarter of 2023, compared to the third quarter of 2022:
Net revenue increased 19.0% to $2.2 billion:
Net revenue increased 12.0% in North America, and increased 49.0% internationally.
Total comparable sales increased 13%, or 14% on a constant dollar basis:
Comparable store sales increased 9%.
DTC net revenue increased 18%, or 19% on a constant dollar basis.
Direct to consumer net revenue represented 41% of total net revenue compared to 41% for the third quarter of 2022.
Gross profit increased 21% to $1.3 billion. Adjusted gross profit increased 23.0% to $1.3 billion.
Gross margin increased 110 bps to 57.0%. Adjusted income from operations increased 24.0% to $436.3 million.
Operating margin decreased 370 bps to 15.3%. Adjusted operating margin increased 80 bps to 19.8%.
Income tax expense increased 2% to $99.2 million. The effective tax rate for the third quarter of 2023 was 28.5% compared to 27.6% for the third quarter of 2022. The adjusted effective tax rate was 28.1% for the third quarter of 2023.
The Company has entered into a partnership with Peloton Interactive, Inc. for the provision of digital fitness content and will no longer produce its own content for the lululemon Studio Mirror. While the Company will continue to service and support existing subscribers, it has ceased selling the Mirror hardware. The Company recognized post-tax asset impairment and other charges related to lululemon Studio totaling $72.1 million during the third quarter.
Diluted earnings per share were $1.96 compared to $2.00 in the third quarter of 2022. Adjusted diluted earnings per share were $2.53 in the third quarter of 2023.
The Company opened 14 net new company-operated stores during the third quarter, ending with 686 stores.
Will Nance — Goldman Sachs
I've always wanted to do that.
So look, the activity levels has been the topic du jour. I think we were chatting before we got on stage. We actually took our numbers up really significantly on Coinbase to reflect some of the recent market volatility and elevated activity levels this morning. But would love to hear what you guys are seeing so far and how you would kind of contextualize what we've seen happen in crypto markets over the last couple of months?
Alesia Haas — Chief Financial Officer
Absolutely. Well, it's always important to talk about how crypto is volatile. And the last 6 weeks - 12 weeks have proved no difference in that. Since the end of Q3, Bitcoin is up in the neighborhood of 60%. We've seen volatility materially change quarter-to-date. And when I look at volatility in the month of November and what we see right now, it looks much more like Q1 of 2023. This is a mark-in change from Q3 where we just shared with you that we had seen record low volatility that we hadn't seen since the 2016 time period.
Will Nance — Goldman Sachs
Right.
Alesia Haas — Chief Financial Officer
So, a few months later, we're back to Q1 levels. What this draw is that we've talked about for a long time is price and volatility tend to be the biggest factors of our trading volume, and as well as the market trading volume. And so in the market, we've seen average daily trading volumes up 60% Q4 quarter to-date versus Q3. So, night and day, behavior differences that we've seen over the last few weeks. And it just shows how quickly these markets can move.
Earnings Results Notes
In the question and answer document released along with their earnings presentation, the company provided color on the state of market conditions, production and wholesale shipments in the North American region, as well as outlook on their European segment and the state of product pricing.
With regards to North American market conditions, THOR Industries noted significant softness relative to the record performance levels achieved in the industry in 2021 and 2022. Going into the company's earnings, the Recreational Vehicle Industry Association had reported 70,151 towable and 10,991 motorized unit shipments for the months of August, September, and October, representing the weakest August through October (THOR Industries' first quarter) performance ever reported by the RVIA. The company's actual segment results were as follows:
Travel Trailer Shipments: -10.75% year-over-year (following -53.81% drop in Q1 2023)
Fifth Wheel Shipments: -21.04% year-over-year (following -48.77% drop in Q1 2023)
Class A Shipments: -43.93% year-over-year (following -11.00% increase in Q1 2023)
Class B Shipments: -22.42% year-over-year (following +22.91% increase in Q1 2023)
Class C Shipments: -29.94% year-over-year (following +19.23% increase in Q1 2023)
At the Q4 2023 earnings report, when asked about possible impending decreases in 2024 and legacy model pricing, the company acknowledged that they are enacting strategies to "reduce wholesale pricing on model year 2024 units to [their] independent dealers and create buying propositions that resonate with retail customers." For this reason, the company indicated an expected reduction in the average selling price of up to 10% for towable products, as well as discounts for their motorized offerings.
THO Travel Trailer ASP: $27,376.84 (-15.64% year-over-year)
THO Fifth Wheel ASP: $59,509.30 (-16.61% year-over-year)
THO Class A ASP: $192,510.19 (-8.36% year-over-year)
THO Class B ASP: $116,315.72 (-4.26% year-over-year)
THO Class C ASP: $109,614.45 (-2.93% year-over-year)
As noted above, the company's European segment provided support for the challenging quarter, with quarterly sales of $708.2 million, up 40.43% year-over-year. The company's backlog data also presents the reality of a challenging demand environment, with the company's total backlog falling to its lowest nominal level since the onset of the pandemic.
Earnings Call Content Summary
CRM ended another quarter with top line revenue beating guidance, with strength shown across all clouds.
The call saw repeated mentions of Data Cloud as being the core of all other clouds as CRM prepares for the productivity revolution coming from generative AI, which is very data dependent.
Aside from excitement for AI and their potential, CRM addresses their focus on margins and doubles down on improving them further.
While a challenged macro environment is expected to persist, CRM has seen some bright spots during the quarter.
DocuSign Announces Third Quarter Fiscal 2024 Financial Results
“DocuSign had a solid third quarter, delivering record non-GAAP operating margin and free cash flow,” said Allan Thygesen, CEO of DocuSign. “We are making progress on product innovation, go-to-market effectiveness, and operational efficiency as we build on our considerable scale and trusted market position and expand beyond e-signature into intelligent agreement management.”
Operational and Other Financial Highlights
2023 Gartner Magic Quadrant Leader: For the fourth year in a row, DocuSign was named a Leader in the 2023 Magic Quadrant for Contract Life Cycle Manager report by Gartner, Inc. This year, among the 16 vendors evaluated, DocuSign was one of only five leaders and placed highest on the "ability to execute" axis.
DocuSign India: DocuSign announced the opening of our engineering center of excellence in India. With the office opening, we’ll be able to recruit top talent and accelerate our ability to deliver critical data-focused product innovation while increasing our global presence.
DocuSign 2023 Releases: DocuSign announced new product capabilities for generating agreements, creating better signing experiences and managing end-to-end agreements. Highlights of our recent product release include:
DocuSign eSignature and Microsoft Power Pages Integration: Easily integrates DocuSign eSignature into Microsoft’s DIY website builder, Power Pages. This integration allows Power Pages makers to give customers a secure way to digitally sign documents without leaving their website—even forms that require multiple steps. Teams in any industry can use this functionality to simplify workflows for common documents that need to be signed (e.g. consent forms, medical agreements, benefits forms, license applications, etc.).
Seamlessly Embedded Agreements: An enhancement to Embedded Signing enables users to easily configure the display format so that agreements can seamlessly match the look and feel of websites or applications. Users can also configure different signing methods, including click-to-sign, to eliminate friction points and optimize conversion rates to eliminate potential abandonment of agreements.
Agreement Reminders: CLM Essentials customers can now manage their contracts more efficiently. By scheduling custom email agreement reminders, users can avoid missing important contract milestones, like contract expiration, renewal, or follow-up deadlines. Users can customize reminders for each recipient group, such as billing reminders for finance or account check-in reminders for sales.
Sheldon McMeans — Barclays
Great. Yes. Good morning. Welcome to our next session. My name is Sheldon McMeans and I help support Rimo covering the US enterprise software space. I'm really pleased to be here with Todd McElhatton. Todd, thanks for joining us.
Todd McElhatton — Chief Financial Officer
Good to be here, Sheldon. Thanks for the invitation.
Sheldon McMeans — Barclays
Great. Well a lot of the audience here are software investors, but may have a little less knowledge on some of the underlying technology that helps power them in monetization platforms like Zuora. To kind of level set the group here, could you give a background on Zuora and the problem that you try to solve for customers?
Todd McElhatton — Chief Financial Officer
Sure, Zuora helps any type of company figure out how can they price, package, and monetize new services. What we're seeing a lot of is how do I go with consumption type business; how do I have a recurring revenue business. We talk a lot of times about subscriptions. I think there are times maybe subscriptions limits us because we have a much greater impact than that.
And what's really interesting is a lot of times people like; how tough can billing be and what we find is actually it's a huge inhibitor a lot of times for companies, especially as they're developing new products or especially as they're developing new services. The existing technology stack they have doesn't allow them to have the innovation that they need to get things out at the speed they want to.
And so what you've seen is companies like Zoom, General Motors, New York Times have all come to Zuora and 1,000 plus other large enterprise customers. We're helping power these new businesses which are really driving growth. So that's what Zuora does and we've really differentiated ourselves and lead in that market space.
Operator
Good morning, and welcome to The Kroger Co. Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Quast, Senior Director, Investor Relations. Please go ahead.
Robert Quast — Senior Director, Investor Relations
Good morning. Thank you for joining us for Kroger's Third Quarter 2023 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen, and Chief Financial Officer, Gary Millerchip.
Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information.
After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Rodney.
Rodney McMullen — Chairman and Chief Executive Officer
Thank you, Rob. Good morning, everyone, and thank you for joining us today. Before we begin, I'd like to take a moment to outline our discussion topics this morning. I will begin by covering the current retail environment and how the strength of Kroger's value creation model is supporting earnings growth and generating strong free cash flow. Then, Gary will cover our financial results and guidance for the remainder of the year. Finally, I will conclude with an update on our proposed merger with Albertsons, before we open it up for questions.
Now, turning to our third quarter. Kroger's third quarter results highlight the strength and diversity of our business model in a challenged operating environment. A strong fuel performance and growth in our alternative profit businesses supported continued adjusted net earnings per diluted share growth.
As consumer spending tightens, we are focused on providing customers with exceptional value by maintaining our long-term commitment to lower prices, personalized promotions and rewards. We are growing households and increasing loyalty, positioning Kroger for sustainable future growth.
Harley Finkelstein — President
So it's been — it's been a minute since we've done something like this in New York. And yesterday, we spent the whole day together talking to merchants, and I know your second-most favorite thing after talking to merchants is Investor Days. So we're really, really glad you're here on this.
But something actually that I was thinking about as we were just in the green room, almost 9 years ago to the day — excuse me, 9.5 years ago, — excuse me, 8.5 years ago, we were in New York City, taking the company public. And many of you were there, many of you we actually met on the roadshow. But I was thinking back about some of the things we heard on the roadshow, some of the things we thought were interesting. We didn't think they were true but they were interesting. Things like Shopify's TAM may not be big enough. Shopify may never scale in terms of throughputs, and even things like Shopify may not be able to handle big businesses, and I'm curious, from your perspective, 8.5 years later, is that still funny to you?
Tobi Lütke — Founder & Chief Executive Officer
Well, no. It's not funny. I actually think that was maybe a controversial take. I think that might actually have been right. I — but let me get back to this; I'm going to break before for a second. I want to actually say — and I think we're going to get together here, just because it's 8.5 years since IPO, it's hard to believe. So that, I think runs to a decade. That was an opportunity to really explain the company. We have done a lot of financial calls since, and given updates. But I think it's important every once in a while to take it from the top because I think those are the moments when everyone can just separate the tactics from the strategy. Shopify is playing a very long game. That's what we all said we would and we want everyone to have a really good model for how the company thinks. Because actually, I think that's the kind of thing that lasts. And that's the thing that people invest in, right? Like it's, so this is a great opportunity, I'm glad we're doing this.
So I think, look, I've heard concerns with the TAM in the first times I did like raise funding and doing the roadshow. I think it's really, really fair and I think it's actually reasonably correct. I think there is a underappreciated component there, which is like, well, the TAM can be changed. I think people can be right about the TAM is small for an online store business but also like overlook that the TAM could be significantly better — bigger if certain conditions are met. And the question — I think the better question there is like, why was Shopify able to grow this market so significantly. And I think that's happened for because I think what a company at its best can be, like all great companies are following a vision, following a mission to gain insight into the vision. And a sort of a collaborative inquiry and some hypothesis all at the same time. And my hypothesis is that new business formation, entrepreneurship are very valuable and are constrained in their demand simply due to the friction of meeting it.
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