👉 Week in Review: 12/11/22
"The market changes. It’s a completely different environment we’re in right now..."
Are you fading as we approach the end of the year?
Perhaps this will wake you up a bit…
Paul Tudor Jones is the founder of Tudor Investment Corporation and one of the best macro traders in the world (and a UVA grad — go Hoos). He’s best known for his clairvoyance with market moves related to interest rates and currency fluctuations. We found his quotes below from an October interview with CNBC to be very powerful:
“The Fed’s really caught between a rock and a hard place. You’ve got wage inflation at +5.5%. That has to come down to +3.5% for us to get inflation back to 2%…And that’s really, really hard to do…
If you think about every decade:
The 70s was the decade of inflation.
The 80s was a decade of kind of boom / bust, huge swings in dollar volatility.
The 90s were equitization and the Dot Com Bubble.
The 2000s were the Mortgage Bubble and the Great Financial Crisis.
The 2010s were the peak of globalization and probably the peak of central bank experimentation with monetary policy.
The 2020s — I’m afraid — are going to be that period where we really focus on debt dynamics country-by-country, fiscal deficits, and the need to run fiscal policy in a way that gives people confidence in the long-run value of the currency. The problem that we’ve had really for the last 12 years is that we’ve done this massive experimentation with monetary policy where we suppressed yields, and we did this massive experimentation with the fiscal side during the pandemic. So my guess is the 20s are going to be just the opposite of them both… whoever is the President in ‘24 is going to be dealing with debt dynamics that are so dire, that we’re going to have fiscal retrenchment (which essentially means responding aggressively to budget crises).
It’s so hard to take what we’ve learned from investing for the past 12 years and put that behind you — but you really have to… The market changes. It’s a completely different environment we’re in right now.
When I think about the “January Effect” that we’re going to see next year and all of the money that theoretically is going to come into the stock market and bond markets. All of a sudden, if 2-Year rates are 4.3% and higher — you’ve got to wonder if you’ll get the same flush into assets that you usually see in January, February, and March because all of a sudden for the first time in 13 years we’ve got a really attractive short-term rate of 4.3%. — Paul Tudor Jones
Week in Review — Too Long, Didn’t Read:
Costco will be a great pick-up once it’s (hopefully) trading lower, Academy Sports & Outdoors has been a huge winner, SentinelOne continues to prove that it’s the industry standard, MoneyLion turned heads at its first-ever Investor Day, Southwest Airlines announces a dividend despite pilots protesting its Investor Day, Microsoft is named the Best-Managed Company in the US, Consumer Credit continues to beat estimates (in a bad way), and Consumer Sentiment, Factory Orders, & the ISM Services Index all saw positive momentum.
Key Earnings Announcements:
Comprehensive breakdowns of Costco, Academy Sports & Outdoors, & SentinelOne.
Costco (COST)
Key Metrics
Revenue: $54.4 billion, an increase of +8% YoY
Operating Income: $1.8 billion, an increase of +3% YoY
Profits: $1.4 billion, an increase of +3% YoY
Earnings Call Callout
“Now a few comments regarding inflation. Recall, we've seen some minor improvements in a few areas. Hopefully, continuing the comment I made last quarter's earnings call, a little light at the end of the tunnel, but it's still little. Recall last quarter in the fourth quarter, we estimated that year-over-year price inflation was about 8%. In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6% to 7%.”
My Takeaway
Overall, Costco’s earnings report was generally in-line with consensus expectations. We learned a few things – the near-term could remain choppy given fluctuations in inflation, e-commerce demand, macro-economic pressures, and supply chain constraints. Despite this near-term chop, the long-term underlying fundamentals of their business remain well intact.
US and Global traffic remain consistently positive (+4% globally and +2% in the US) and total members continue to move in the right direction (+7% year-over-year), even when you factor in new store openings.
Specifically, Costco’s product mix (52% food / consumables), clean balance sheet (~$10.9B in cash), and sticky (92.5% US-based renewal rate) customer base position it well to continue to gain market share in a variety of macro-economic conditions. It’s also reassuring to know that the company is planning to open +20-25 new locations / year throughout both the US and globally.
With that being said, it seems like there isn’t much upside in the near-term on stock price. The company is currently trading at ~36X forward EPS – which is their rolling 9-year average. We’ve seen the stock trade below this average in the past, and if it does again I’ll be a buyer.
Academy Sports & Outdoors (ASO)
Key Metrics
Revenue: $1.5 billion, compared to $1.6 billion last year
Operating Income: $179.5 billion, compared to $216.1 billion last year
Profits: $131.7 billion, compared to $161.3 billion last year
Earnings Release Callout
“The third quarter was challenging for Academy; however, we delivered a good profit performance that, while below last year, was in line with our expectations. Our team continues to execute at a high level in an uncertain environment, delivering results well above pre-pandemic levels on all measures.
Our focus is on our long-term growth opportunities in stores and online through consistent operational excellence, strong financial discipline, and executing our store and omnichannel expansion plans."
My Takeaway
Boom! After sharing the stock in a dedicated stock pitch earlier this week, their earnings results caused the price to pop +12% – let’s go! I hope some of y’all took advantage of that. Let’s now walk through some of the good and the bad of the quarter.
The Bad:
Comparable sales (-7%) were well-below consensus estimates (-4%) during the quarter. This caused the above-shown revenue year-over-year contraction of roughly -$100M. However, this was largely expected and in-line with company guidance. After doing some more digging I realized the entire decline in comparable sales was catalyzed by their “outdoors” category – which experienced an -18% YoY comparable sales decline. Mind you, this was likely catalyzed by the “let’s all go outdoors” movement in 2021 because of Covid lockdowns. However, all of their categories remained positive and strong when compared to pre-pandemic levels.
The Good:
From a margin perspective, their gross margin of 35.0% were stronger than consensus estimates of 33.7% – and this led to a stronger-than-expected operating margin of 12.7% (compared to 12.0% expected). This expansion was catalyzed by strong sales momentum in footwear and apparel – likely experienced during back-to-school shopping.
A good / bad scenario impact was e-commerce momentum during the quarter – now making up 9.5% of sales compared to only 8% last year. This is a good thing because the company is able to retrieve more customer data and make sales they might have not been able to in the first place.. but also a bad thing because shipping costs eat into their margins when compared to just selling in-store.
Finally, we were able to get a glimpse into the company’s full-year guidance. ASO guided to $6.46B in revenue (down from $6.53B) and comparable sales down -5.5% (compared to -4.5%) as the company’s management team continues to exercise caution given the macro environment and continued volatility in their outdoors category.
Despite the caution, the company is guiding to +30% sales growth when compared to pre-pandemic levels. Compare this now to Dick’s Sporting Goods who actually raised their full-year guidance. Some are speculating the outdoor category exposure as explained above is minimal for DKS – but meaningful for ASO.
So why did the stock trade up on the news? ASO raised their EPS guidance to $7.57, compared to $7.12 expected – due to their aggressive share repurchasing YTD. All-in-all, I’m still excited about this company from a dividend growth perspective.
SentinelOne (S)