Happy Sunday and hereās a friendly reminder thatā¦
ā¦cash is still king. Weāre not saying that you have to be āall-inā cash. And weāre, of course, not saying that all investments over the coming weeks or months are foolish ones.
Weāre saying that when Disposable Income in the U.S. looks like thisā¦
ā¦and when the Personal Savings Rates looks like thisā¦
ā¦ it may be smart to have as much dry powder as possible leading into a likely ugly Q1. As you all know, Iāve been stacking cash since this post in February ā and much of that will be deployed toward my Dividend Growth Portfolio in Q1.
More information about that, and how you can follow along, coming on Tuesday (12/6) ā stay tuned!
āItās the path. I mean nobody cares about whatās going to happen in 12 months. They need to deal with the next three to six monthsā¦ Thatās where we actually think thereās significant downside. So, while 3,900 sounds like a really boring six months. No... itās going to be a wild ride.
You should expect an S&P between 3,000 and 3,300 some time in probably the first four months of the yearā¦Thatās when we think the de-acceleration on the revisions on the earnings side will kind of reach its crescendo.
The bear market is not overā¦Weāve got significantly lower lows if our earnings forecast is correct.ā
ā Mike Wilson, Chief U.S. Equity Strategist & Chief Investment Officer @ Morgan Stanley
Week in Review ā Too Long, Didnāt Read:
Crowdstrike left ~$25M of ARR on the table, Kroger experienced a +32% increase in digital engagement, Dollar General announced their intentions to add +3,170 locations by 2031, Amazonās AWS event in Las Vegas wasnāt that great, Chinaās āreopeningā is to be taken with a grain of salt, Core PCE came in cooler than expected, Fed Chair Jerome Powell was perceived as more dovish than in recent months, and the U.S. Labor Market remains very tight.
Key Earnings Announcements:
Crowdstrike left ~$25M of ARR on the table, Kroger experienced a +32% increase in digital engagement, and Dollar General is expecting to add +3,170 more locations.
Crowdstrike (CRWD)
Key Metrics
Revenue: $581.0 million, an increase of +53% YoY
Operating Loss: -$56.4 million, compared to -$40.3 million last year
Net Loss: -$54.6 million, compared to -$50.5 million last year
Earnings Release Callout
āCrowdStrike delivered robust growth at scale, strong retention rates, growing module adoption, record net new ARR from emerging products and a record number of customers contributing at least $1 million to net new ARR.
However, total net new ARR was below our expectations as increased macroeconomic headwinds elongated sales cycles with smaller customers and caused some larger customers to pursue multiphase subscription start dates, which delays ARR recognition until future quarters".ā
My Takeaway
The story here is multifaceted, so letās breakdown both the good and the bad.
The good:
The company reported +53% revenue growth, a 15% non-GAAP operating margin, record non-GAAP profits, record free cash flow of $174M (30% of revenue), and a record high number of customers paying $1M+ in annual recurring revenue (ARR) (+67%). The company also experienced a record-high 98.1% customer retention rate (compared to their historical average of 97.5%).
The bad:
The company is seeing the negative impacts of an ever-evolving macroeconomic environment. Because of economic uncertainty, their sales team was unable to close enough sales to boost their net-new ARR to record levels (+$219M) ā coming in at a modest $198M. Management stated during their earnings call ARR fell below internal expectations due to elongated sales cycles with small customers, along with larger customer instead opting to phase-in to their subscriptions.
If we back into the math on that ā āelongated sales cyclesā left ~$15M in ARR on the table, and phase-in subscriptions left ~$10M in ARR on the table. So in a perfect world, the company would have seen +$223M in net-new ARR.
The verdict:
If we take a step back, during the companyās earnings call last quarter their management clearly stated āWhile we do not guide to net new ARR, given the unseasonal strength in net new ARR delivered in both Q1 and Q2 of this fiscal year, we believe it is prudent to assume less pronounced quarter-to-quarter seasonality in the back half in comparison to prior years.ā The company was warning against this.
Their management team made it very clear their pipeline is at record highs, we saw record high customer retention rates, their FCF margin is ~30%, and more and more customers are using more and more products inside of their platform. However, their forward guidance of $625M in revenue came in below the Streetās $634M expectations.
If weāre looking at this company from a FCF per share perspective, nothing has changed. The business will do $2.2B in revenue this year ($670M in FCF) and this figure jumps +30% to $870M in 2023. Shares seem to be fairly valued now at $120 / share ā although, Iād imagine there could be more downside risk if macro pressures continue. Thereās now a clear disconnected in stock price (black line) and operating cash flow (blue line) ā these two used to move together. The company is still positioned for long-term success in my opinion and Iāll continue to DCA.
Kroger (KR)
Key Metrics
Revenue: $34.2 billion, an increase of +7% YoY
Operating Income: $841.0 million, compared to $868.0 million last year
Profits: $398.0 million, compared to $483.0 million last year
Earnings Release Callout
āKroger continues to generate strong free cash flow and remains committed to investing in the business to drive long-term sustainable net earnings growth, as well as maintaining its current investment grade debt rating. The Company will continue to pay its quarterly dividend and expects this to increase over time, subject to board approval.ā
My Takeaway
Kroger reported better than expected quarterly results, and subsequently raised their full-year outlook. The company expanded upon the idea of value-oriented behavior accelerating, with growth in identical sales being catalyzes by private label momentum.
Another interesting statistic shared during the quarter is the companyās strategy as it related to driving digital adoption. Their business strategy is quite literally called āLeading with Fresh, and Accelerating with Digital,ā and itās certainly working. Theyāre leaning heavy into their loyalty program ā which has seen continued adoption given continued inflation country-wide.
By offering targeted promotions on products their AI recommends for loyalty shoppers, digital engagement expressed through digital coupon clipping has increased +32% YoY.
Non-fuel Identical sales increased +6.9% YoY, while their private label brand sales increased +10.4% YoY. The company also maintained a 21.5% gross profit margin ā down -5 basis points YoY, a good thing when you think about the negative impact of higher inflation and staying competitive from a pricing perspective.
Their management team didnāt share anything new in relation to their acquisition of Albertsons ā something that will take a long time to go through government approval. However, Kroger did confirm that theyāre not reinvesting back into the business in the form of share buybacks ā theyāre instead saving this money to pay off the debt incurred by the acquisition.
Still incredibly happy to be adding this company to the dividend growth portfolio.
Dollar General (DG)