👉 Week in Review: 11/20/22
“Even dovish assumptions about the state of monetary policy justify additional rate hikes.”
The year is winding down…
…and the charts are heating up. The chart-lovers have been having a field day with predicting where this bear market rally takes us. Below is an interesting example coming from Fibonacci Retracement levels:
Just so we’re clear — we don’t pretend to be technical analysis (TA) experts (that’s Katie Stockton), and we really suggest you don’t worry too much about daily price movement unless you’re an avid trader.
If all you care about is buying and holding for a long time — most of your favorite stocks will be “on sale” soon. We still firmly believe this to be true.
Not to mention… QT has hardly made a dent:
Week in Review — Too Long, Didn’t Read:
Walmart appears to be in better shape than Target, Nvidia had to write-down -$700M in inventory, Hedge Funds reveal their holdings, GM thanks the government for EV credits, P&G is trimming things down, Buffett bets big on TSM, Fed Speeches paint a less-than-stellar picture, Retail Sales crush expectations, and the Bloomberg Economic Survey comes in pretty ugly.
Key Earnings Announcements:
Walmart appears to be incredibly resilient, Target’s margins aren’t bouncing back, and China caused a -$700M inventory write-down for Nvidia.
Walmart (WMT)
Key Metrics
Revenue: $152.8 billion, an increase of +8.7% YoY
Operating Income: $2.7 billion, compared to $5.8 billion last year
GAAP Net Loss: -$1.8 billion, compared to $3.1 billion in net income last year
Adjusted Net Income: $4.1 billion, flat YoY
Earnings Release Callout
“Walmart U.S. continued to gain market share in grocery, helped by unit growth in our food business. We significantly improved our inventory position in Q3, and we’ll continue to make progress as we end the year.”
My Takeaway
Despite their GAAP net loss of -$1.8B, investors were delighted with the earnings results. Just so we’re all on the same page as to where this net loss stemmed from — their unrealized equity investment loss in JD.com and their opioid litigation suit were the drivers of the loss. Their adjusted net income was ~$4.1 billion.
Comparable sales were up +8% (compared to the +3% expected) – driven higher by increases in average ticket size (+6%) and transaction volume (+2%). Also worth noting that grocery comparables sales were up mid-teens, but this was instead driven higher by inflation.
With that being said, Walmart experienced slight contraction when it came to general merchandising. This included weakness in electronics, home, and apparel. Walmart also shared some incredibly valuable information as it relates to macro-headwinds:
~75% of their grocery market share gains (new customers) came from high-income households (>$100K / annually)
Walmart-brand (lower price point) food sales increased +1.3%
Less purchasing of baby food, dog food, baking goods, and proteins
Walmart’s earnings seemed to tick all of the boxes for Wall Street — higher comps, increasing market share, and the continued realization of operating leverage. The company is poised to withstand a looming recession relatively well given their low (~32%) percent of sales exposed to discretionary spend, especially when compared to Target (~54%) — among other historical reasons related to inflation and interest rates. Bullish on Walmart.
Target (TGT)
Key Metrics
Revenue: $26.5 billion, an increase of +3.4% YoY
Operating Income: $1.0 billion, compared to $2.0 billion last year
Profits: $712.0 million, compared to $1.5 billion last year
Earnings Release Callout
“In the latter weeks of the quarter, sales and profit trends softened meaningfully, with guests’ shopping behavior increasingly impacted by inflation, rising interest rates and economic uncertainty. This resulted in a third quarter profit performance well below our expectations.”
My Takeaway
Q3 was a disappointing quarter – leaving little for bullish investors to latch onto. Further, the slowdown in demand (as shared above) the company experienced late in the quarter creates uncertainty not only about Q4’s earnings — but the margin recovery expected to take place in 2023.
The company reported earnings per share of $1.54, far below Wall Street’s estimates of $2.16 — driven lower by both heavy inventory levels and wage increases. The bullish investment thesis that surrounded Target earlier this year was centered around inventory levels and margin recovery in 2023 — but their recent earnings certainly challenges that thesis … as their topline momentum is beginning to show weakness.
The company is now guiding to a low single-digit decline in comparable sales in Q4 — compared to the +3.2% increase Wall Street was expecting.
All in all, Walmart is clearly the retailer that is slated to do well during this macro slowdown. Target isn’t only guiding to lower comps during Q4, but their margin profile isn’t turning around as quickly as investors had originally hoped. Bearish on Target.
Nvidia (NVDA)
Key Metrics
Revenue: $5.9 billion, compared to $7.1 billion last year
Operating Income: $601.0 million, compared to $2.7 billion last year
Profits: $680.0 million, compared to $2.5 billion last year
Earnings Release Callout
“We are quickly adapting to the macro environment, correcting inventory levels and paving the way for new products. The ramp of our new platforms is off to a great start and forms the foundation of our next phase of growth.”
My Takeaway