Category: General

Should Investors Buy Into the Recent Lululemon Athletica (LULU) Hype

Posted on by The INO.com Team

The month began with athletic apparel retailer lululemon athletica inc. (LULU) reporting its earnings for the first quarter of the fiscal year 2023. The company surpassed both top-line and bottom-line expectations to take the Street by pleasant surprise. Its revenue jumped 24% year-over-year to $2 billion, while its earnings per share came in at $2.28.

While decades-high inflation and increased borrowing costs instituted to rein it in have been weighing heavily on consumers’ budgets and forcing middle-income consumers to trade down the value chain to budget-friendlier options, high-income segments have been relatively unaffected.

Hence, LULU, which sells high-end yoga pants, shoes, and other athletic wear, said it had seen no changes in its customers’ shopping habits. In fact, despite raising its prices around this time last year, the retailer still found shoppers flocking to its stores and filling up their digital carts. This led to 13% and 16% year-over-year increases in comparable store sales and direct-to-consumer net revenue, respectively.

According to CFO Meghan Frank, LULU has also been helped by lower air freight costs and the reopening of the Chinese economy, as the revenue from the country alone grew by 79% from the previous-year period when about a third of its 71 stores there were closed due to strict restrictions under its “Zero-Covid” policy.

As a result, LULU’s gross margins increased 3.6 percentage points to 57.5% in the quarter, above the 56.7% analysts had been expecting. The company’s stellar performance has encouraged it to expect its second-quarter sales to be in the range of $2.14 billion to $2.17 billion, representing growth of about 15%, and diluted earnings per share to be in the range of $2.47 to $2.52 for the period.

For the full year, LULU has raised its guidance. The company expects its revenue to be in the range of $9.44 billion to $9.51 billion, up from a previous range of $9.31 billion and $9.41 billion. Also, it expects EPS to be $11.74 to $11.94 compared to the earlier estimate of $11.50 to $11.72.
Moreover, it expects to open 50 net new company-operated stores in the fiscal year, with a majority of 30 to 35 planned for international markets expected to open in China.

The bullish outlook was promptly reflected in the price action, with the stock surging by more than 12% in extended trading after the earnings release.

Our Take

Notwithstanding LULU’s bullishness regarding its prospects, retailers across the industry have cited a pullback in discretionary spending and higher-ticket items. In fact, during the earnings call of Nordstrom, Inc. (JWN), its executives noted that although the high-end customer is “pretty resilient,” they’ve also become more cautious.

Secondly, with the $500 million acquisition of Mirror in June 2020, fueled by misplaced expectations that people would continue to exercise at home, even after Covid pandemic restrictions ended and gyms reopened, turning out to be a dud, LULU’s at-home fitness business is in jeopardy.

While the company has approached its competitor, Hydrow as a potential buyer for Mirror, it has since incurred $443 million in impairment charges and has rebranded its at-home fitness business as Lululemon Studio. The segment has also pivoted from being solely hardware-focused to launching a new digital app that gives its members access to its fitness classes without needing to buy its hardware.

Lastly, but perhaps most importantly, as mentioned earlier, sales growth in China over a small base during the previous year-period due to strict public-health restrictions has been responsible for LULU’s recent outperformance. Achieving a similar growth rate this time around will be challenging in an economy whose faltering recovery is evident from the 7.5% year-over-year decline in exports in May.

More ominously, for a company whose primary target segment is the young and upwardly mobile, China is facing a demographic decline. Moreover, high competition and a grueling “996” work culture have been giving rise to countercultural trends such as “tang ping” (lying flat in Chinese) and “bai lan” (let it rot) while driving an ever-increasing switch from a white-collar job to “qing ti li huo” (or light labor in Chinese).

Bottom Line

While the momentum of LULU that is expected to sustain itself in the second quarter could help traders make quick money by the time the company’s next earnings release is due, seldom, if at all, has big money been made by investors buying what is hot on the Street.

Analyzing the Future of Retail Stocks and How Investors Can Stay Ahead

Posted on by The INO.com Team

After registering 0.2% and 1% declines for two consecutive months, on May 16, the advance sales report showed a recovery of 0.4% in retail sales for April. However, this modest rebound missed the Dow Jones estimate of a 0.8% increase.

This muted outlook has also been reflected in the first quarter earnings of Macy's, Inc. (M). Although the mid-tier retailer surpassed the earnings estimates for the quarter, a spring pullback has caused it to miss its revenue estimates and slash its top- and bottom-line guidance for the entire year.
Given the prevailing demand softness in the unfavorable macroeconomic environment, M expects sales of $22.8 billion to $23.2 billion for the year, down from the previous expectations of $23.7 billion to $24.2 billion. The company now expects earnings per share of $2.70 to $3.20, significantly down from the previous guidance of $3.67 to $4.11.

With M joining its peers, such as Nordstrom, Inc. (JWN) and Dollar General Corporation (DG), in reporting lackluster performances, let’s explore what this means for the prospects of retail businesses relative to another sector that has been claiming a greater share of consumers’ budget lately.

U.S. domestic consumption has been on a roller coaster ride over the past three years. People have gone from not being free enough to spend practically-free money to spending like there’s no tomorrow.

That, in turn, led to a not-so-transitory inflation, the hottest since the 1980s, forcing the Federal Reserve to implement ten successive interest-rate hikes in a little over a year to take the Fed funds rate to a target range of 5% to 5.25%.

With consumer debt pushing past $17 trillion to come in at an all-time high during the previous quarter, average American consumers have been forced to rein in their urge to splurge to prevent inflation from biting harder. The Survey of Consumer Expectations for April carried out by the New York Fed showed that the outlook for spending fell by half a percentage point to an annual rate of 5.2%, the lowest since September 2021.

As a result, the middle-income and aspirational consumers have been forced to go bargain hunting to squeeze out the maximum possible value from money which has gotten dearer, as has been witnessed in other periods of economic slowdown throughout history.

Hence, they have been forced to trade down to budget-friendly retailers, such as Walmart Inc. (WMT), which usually cater to low-income consumers leaving the businesses that offer something in between being wrong-footed and stranded.

Although budget retailers have lost sales from low-income consumers, that loss has been offset by increased business from the middle-income consumer segment, who have been frequenting such stores to shop for groceries and other non-discretionary products, contributing to most of the sales.

Consequently, weaker sales have cut across Macy’s brands, including higher-end Bloomingdale’s and beauty chain Bluemercury. According to CEO Jeff Gennette, the “aspirational customer” who shopped more luxury brands has dropped off as stimulus money has dried up.

Likewise, warehouse club Costco Wholesale Corporation (COST) found its famous $1.50 hot dog and soda combo back in the headlines as inflation bit harder to squeeze pockets further. The hot dog combo and its rotisserie chicken, whose price has been pegged at $4.99 since 2009, are the retailer’s loss leaders that lure in customers who are likely to buy other items as well.

This could be helpful, especially in times like these in which, according to CFO Richard Galanti, even COST’s relatively well-to-do members are ditching pricier beef products for cheaper meats such as pork and chicken, while others are bypassing the fresh meat aisle entirely and opting for cheaper canned meat and fish products with longer shelf life.

However, a decline of 0.3 percentage points in the overall outlook for inflation over the next year suggests that things could improve, but probably not before they worsen.

Despite current economic uncertainties and hardships, high-income segments have been relatively unaffected, with affluent patrons queueing up for finer things in life on offer from the likes of Tiffany & Co. and LVMH.

Another sector that’s seemingly unaffected by the mundane hardships of the retail businesses is the colorful world of leisure travel. While the pandemic is firmly in the rearview mirror, there is enough pent-up demand from consumers ever keener to redeem their pile of airline miles and other travel rewards on their credit cards through revenge travel.

Moreover, with a jump of 0.8% in spending in April, with personal consumption expenditure beating estimates to rise 0.4% for the month despite ten consecutive interest-rate hikes by the Federal Reserve, it isn’t difficult to connect the dots and understand why airlines, such as American Airlines Group Inc. (AAL) have turned to bigger airplanes, even on shorter routes, to help ease airport congestion and find their way around pilot shortages.

As a result of this tailwind, AAL’s revenue surpassed the airline’s cost to help it report a $10 million profit during the first quarter of the fiscal year. Moreover, with fuel prices yet to rise significantly due to a stuttering recovery of the Chinese economy and Memorial Day travel topping 2019 levels, the operator has raised its adjusted earnings outlook for the second quarter.

Down at sea, cruise liners such as Norwegian Cruise Line Holdings Ltd. (NCLH) have also found it smooth sailing, with the cumulative booked position for 2023 coming in higher than 2019 levels and occupancy of 101.5% during the first quarter also exceeding the company’s expectations.

The increased demand for, and consequently expenditure on, services and experiences are also evident in the recent employment data, with leisure and hospitality adding 208,000 positions out of the expectation-beating private sector employment increase of 278,000 for the month of May. The sector was also a notable contributor to the increase of 339,000 in non-farm payrolls for the month.

The altered priorities of consumers are also reflected in the stock price action. While M’s stock slumped by more than 19% YTD, AAL and NCLH gained around 19% and 43% over the same period.

Looking Ahead

While it would be an understatement to say that the momentum is firm in the travel and hospitality sector, it might be wise to consider certain things before indulging in the willful suspension of disbelief and extrapolating beyond the foreseeable future.

Since the rise of remote work and virtual teams, facilitated by contemporary collaboration and productivity tools, seems to have become an immune and immutable remanent of the cultural sea-change our work and lives had to adopt and adapt to during the pandemic, new reports give us reasons to doubt whether business travel is ever going back to normal.

In such a situation, with traveling for leisure being an occasional indulgence in most of our lives, there are risks that the pent-up demand might not be enough to sustain the momentum that is propelling the growth performance of travel and hospitality businesses.

Moreover, since technology companies such as Apple Inc. (AAPL) and Meta Platforms, Inc. (META) are finding increasingly innovative ways to immerse people in experiences without needing them to leave their homes, long-term investors with significant leisure and travel sector could find themselves looking nervously over their shoulders over time.

However, businesses in the retail sector, especially the non-discretionary variety, should be able to help their stakeholders sleep easily, knowing that while wants and desires are temporary, needs are permanent, and technology can’t single-handedly fulfill them (yet).

Is eBay (EBAY) the Hottest Buy Ahead of Its New Acquisition?

Posted on by The INO.com Team

Global commerce company eBay Inc. (EBAY) was founded in 1995 as an auction site. Since then, the company has grown into a major online marketplace for peer-to-peer sales operating in 190 markets globally, and has enabled $74 billion of gross merchandise volume in 2022.
Enhancing experience by utilizing the latest technology to empower sellers and buyers and building the trust of customers has been an integral part of the strategy of the online marketplace.

In 2020, EBAY launched its Authenticity Guarantee program, which draws on independent experts to vet and verify items sold on the platform. It was followed up with the debut of an authentication service for luxury handbags that allowed customers to get professional authentication for new and pre-owned handbags from luxury brands such as Saint Laurent, Gucci, and Balenciaga.

Even EBAY’s acquisitions reflect the platform’s unwavering focus on building trust while it increases its penetration in the fast-growing pre-loved segment to differentiate itself from numerous peers focusing on new and largely in-season goods.

As a result, after acquiring marketplace compliance solution 3PM Shield in February 2023 and used-sporting-goods marketplace, SidelineSwap earlier this month, on May 15, EBAY signed a definitive agreement to acquire Certilogo, a provider of AI-powered apparel and fashion goods digital IDs and authentication.

The acquisition is subject to the satisfaction of customary conditions, including regulatory approvals, and is expected to be closed in the third quarter.
Certilogo's platform uses digital technology to tag products with virtual IDs, or “product passports,” that enable traceability and protection against counterfeits. It empowers brands and designers to manage the lifecycle of their garments while providing consumers with a seamless way to confirm authenticity, access reliable information about branded items, and easily activate circular services.

According to Charis Marquez, VP of EBAY, "Certilogo's technology and talented team allows eBay to build on this commitment, establishing eBay as a leader in pre-loved fashion and offering new ways for consumers to connect and engage with brands."

Despite ten consecutive interest-rate hikes by the Federal Reserve in just over a year, the red-hot and decades-high inflation is yet to be sufficiently tamed. Amid the rising cost of living crisis, the appetite for second-hand goods has witnessed phenomenal growth, especially among young shoppers.
Moreover, with increasing awareness and emphasis on sustainable consumption, the stigma surrounding pre-owned goods has all but disappeared while community and circularity have been embraced.

Unsurprisingly, ThredUp’s annual Resale Report showed that the global pre-owned apparel market is set to double by 2027 to $351 billion -- 9 times the growth of the broader retail sector.

However, the concern of ending up with counterfeited goods has fueled the trust deficit and has emerged as a significant roadblock preventing greater adoption. The global market trading in fake goods is worth a staggering $4.5 trillion, with faux luxury merchandise accounting for up to 70 percent ($1.2 trillion), according to a 2019 Harvard Business Report.

Even Washington has expedited its crusade against dupes. It has also received legislative firepower through INFORM Consumers Act, which modernizes consumer protection laws and requires web marketplaces to collect and verify basic business information from sellers before they are permitted to sell online. Moreover, SHOP SAFE Act incentivizes platforms, such as EBAY, to follow best practices for screening and vetting vendors and the products they put up for sale, and forces them to address repeat-counterfeit-sellers.

Given the political emphasis on building and retaining consumer trust, the importance of Certilogo’s assumption can hardly be overstated.
This acquisition would also benefit EBAY’s ecosystem by offering fresh opportunities for small businesses to engage with consumers. By assuring their customers of the legitimacy and sustainability of their products, these businesses could be benefited by improving toplines, driven by repeat purchases from loyal customers.

Lastly, with EBAY’s earnings report last month showing increased traction in the luxury sector, with in-focus categories including watches, handbags, jewelry, and sneakers, its acquisition of Certilogo keeps it well-positioned to keep building momentum.

GameStop (GME) Stock Could Soar on June 7: Here’s What to Watch

Posted on by The INO.com Team

Video game retailer GameStop Corporation (GME), the signature meme stock, had previously been riding some short-term momentum. However, that has since leveled out, and the company has been making progress in right-sizing its business by slashing its inventory levels and reworking its cost structure.
Moreover, the company is undergoing a transitional period by halting its e-commerce efforts and focusing on its brick-and-mortar locations. Furthermore, GME makes changes to its rewards program. Also, GME stock might get a significant boost if there is a ban on short selling.

GME is expected to release its fiscal 2023 first-quarter report on June 7. The quarterly report should show reflect the drastic measures the company has been undertaking to achieve considerable profitability this year.

Let’s discuss the catalysts that could send GME’s stock price to fresh heights:

Favorable Fourth-Quarter Earnings

For the last fiscal year’s fourth quarter, the video game retailer posted its first quarterly profit in two years and surpassed analysts’ expectations for revenue. Its aggressive cost-cutting measures and strong demand for video game hardware in the holiday quarter helped the company become profitable.

For the quarter that ended January 28, 2023, GME reported a profit of $48.20 million, or $0.16 per share, compared to a loss of $147.50 million, or $0.49 a share a year earlier. Adjusted earnings of $1.16 a share beat analysts’ projections of a loss of $0.13 per share.

For the fourth quarter, the company’s net sales dropped slightly to $2.23 billion from $2.25 billion in the year-ago quarter. However, the figure was higher than analysts’ estimates of $2.18 billion.

The video game company had been working vigorously to steer itself back to profitability and partially got there by slashing its inventory levels and costs. Its selling, general, and administrative expenses were $453.40 million for the quarter, or 20.4% of sales, compared to $538.90 million, or 23.9% of sales, in the year-ago period.

Like many retailers, GME struggled with supply chain delays that left the company with a backlog of inventory after it previously tried to meet strong demand. Based on its fourth-quarter balance sheet, the company had $682.90 million in inventory, down from $915 million a year ago.
Furthermore, GME has been trying to improve its cash balance as a part of its revival strategy. The company’s cash and cash equivalents for the quarter were $1.39 billion.

“GameStop is a much healthier business today than it was at the start of 2021,” CEO Matt Furlong said on a call with analysts. “We have a path to full-year profitability.”

Shifted Focus from E-Commerce to Brick-And-Mortar Sales

Ryan Cohen took over GME in 2021, aiming to transform the struggling video game retailer into an e-commerce juggernaut. Unfortunately, the company’s e-commerce sales failed to take off. GME’s losses widened, and Cohen’s new online-sales executives resigned.
As a result, GME began cutting costs. The company canceled plans to build additional warehouses, closed a new e-commerce customer-service center, and laid off many corporate employees hired under the management of Cohen. Also, according to former GME executives and analysts, Cohen miscalculated what customers were prepared to pay through its website and app.

“Quarter after quarter we were unsuccessful with new ventures,” commented Ted Biribin, GME’s former employee. “If something didn't work, senior leadership would go onto something else very quickly.”

GME’s CEO, Matt Furlong, stated in an internal memo last year, “Our stores, in particular, are a differentiator that will help us maintain direct connectivity to customers and position us to have localized order fulfillment capabilities across more geographies. While we continue evolving our ecommerce and digital asset offerings, our store fleet will remain critical to GameStop’s value proposition.”

GameStop is poised for solid growth as the company has stopped focusing on e-commerce sales. Consequently, the company can now provide more support for its 4,400 brick-and-mortar stores. GME also introduced an initiative to motivate the company’s staff.

Last year, the company announced an “improved compensation” scheme for its brick-and-mortar video game store’s most senior employees. For Assistant Store Leaders and Senior Guest Advisers, the compensation comes as an undisclosed rise in their hourly pay. For Store Leaders, it comes in the form of $21,000 worth of GME stock (vested for three years) on top of their regular pay, coupled with “the opportunity to earn additional compensation every quarter by hitting goals for performance-based equity grants.”

GME’s focus on physical stores resulted in the company reporting a quarterly profit for the first time in two years. For the full fiscal year 2022, expenses were reduced by more than $100 million.

GME’s Membership Program Getting a Huge Makeover

GME offers incentives to members of its rewards program to secure customer loyalty. To that end, the company is seemingly making significant changes to its customer loyalty program. The existing PowerUp Rewards membership will have its name changed to GameStop Pro, with the price going up from $15 per year to $25.

GameStop Pro will access some special perks through this new program. Among other incentives, members will get bigger discounts on collectibles, pre-owned games, GameStop brand gear, clearance items, and more. GameStop Pro is expected to roll out on June 27, with existing memberships being phased out as they come up for renewal.

GME’s revised customer loyalty program could enhance profitability and growth for the company.

Prohibition on Short Selling Could Send GME To New Highs

The practice of short selling has come under increased scrutiny amid the recent banking turmoil. Short selling is a well-known strategy in which financial traders bet that the price of a stock will go down. Short sellers largely profited from the banking crisis by borrowing shares they expected to fall and repaying the loan for less later to pocket the difference.

In March 2023, Wachtell, Lipton, Rosen & Katz, a law firm known for representing large companies in mergers and against attacks from hedge funds, called on U.S. securities regulators to restrict short sales on financial institutions. Also, the calls from Capitol Hill and elsewhere to prohibit short-selling have gotten louder lately.

With more regulators and lawmakers ramping up their calls for an outright ban on short selling, investors should prepare for potential legal changes. As traders anticipate this possibility, GME stock could get squeezed higher quickly. The r/WallStreetBets crowd might start a massive short squeeze in anticipation of a potential short-selling ban.

How Should Investors Approach the Stock

The stock has risen 33.5% year-to-date, beating the 11.5% gain in the S&P 500 index. Moreover, shares of GME have gained 20.1% over the past month and 32.1% over the past three months.

As investors think the company can pull off a successful business turnaround, GME stock has risen recently. The video game retailer has essentially pivoted its focus to brick-and-mortar sales instead of e-commerce sales with an eye on improving profitability. The shift already resulted in its first quarterly profit in over two years.

Moreover, the revised customer loyalty program, GameStop Pro, is a smart move that could bolster the company’s top-line results in 2023. At the same time, a potential ban on short selling could prompt a massive final squeeze for GME stock. Now, all eyes are on GME’s first-quarter fiscal 2023 earnings, to be released on June 7, after the market close.

Over the past few years, stock traders and price chasers have targeted GME, but sensible investors should avoid emotional trades and monitor the company’s financial and operational progress.

Investors could also keep tabs on the buying activity of GME’s insiders. After all, if the company’s insiders express their confidence through share purchases, that is probably a positive sign for the stock. Director Larry Cheng recently purchased 5,000 shares of GME worth about $114,000. Following this purchase, Cheng now owns a total of 44,088 shares.

While many strong forces propel GME, investing in the stock still involves a high level of risk. Investors should continue to expect GME stock to remain volatile (with a 24-month beta of 1.90), and it is not appropriate to pour their entire account into this one stock.
Though it is advisable to take a small position in GME stock, as it may be on the cusp of a breakout, and the share price is likely to shoot higher in the near future.

Is Ford Motor (F) the New Tesla (TSLA)?

Posted on by The INO.com Team

More than a year has passed since an announcement on April 26, 2022, by Ford Motor Company (F) CEO Jim Farley, regarding the company’s intent to challenge Tesla, Inc. (T) as the global EV leader.

Since then, the Detroit automaker has made huge strides in the electric mobility space. It has pipped TSLA to the pickup segment by beginning production of its F-150 Lightning and benchmarked the Model Y for its Mustang Mach-E crossover. While TSLA is still the runaway leader, F notched 61,575 fully-electric vehicle sales to emerge as the challenger in the U.S., something the legacy automaker planned to achieve by mid-decade.

Since both rivals are expected to battle it out for a greater share of the electric-mobility pie, it is understandable why an unexpected announcement by the CEO of both companies to join hands to enlarge the pie took the industry and markets by pleasant surprise.

On Thursday, May 25, during a live audio discussion on Twitter Spaces, Jim Farley and Elon Musk announced an agreement on charging initiatives for Ford’s current and future electric vehicles. Under the agreement, current Ford owners will be granted access to more than 12,000 Tesla Superchargers across the U.S. and Canada starting early next year.

Moreover, the next generation of Ford EVs, expected by mid-decade, will include TSLA’s charging plug, enabling owners to charge their vehicles at Tesla Superchargers without an adapter while using Ford’s software.
A separate Ford spokesman later added that pricing for charging “will be competitive in the marketplace.” The companies will disclose further details closer to a launch date, anticipated in 2024.

Following this announcement, which makes F among the first automakers to explicitly tie into the TSLA network, the former’s stock rose by 6.2% on May 26, closing at $12.09 per share, while the latter’s shares also climbed by 4.7%, ending the week at $193.17.
In this article, we elaborate on why the optimism makes sense.

Firstly, as F is ramping up its production to double its EV capacity this year and looks on course to get to two million in a couple of years, with public charging of electric vehicles being a major concern for potential buyers, charging infrastructure is going to be critical for the company in order to ensure that it delivers a superior after-purchase experience to its customers.

TSLA is the only automaker that has successfully built out its own network of fast chargers, which gives the EV leader an edge over its competitors, whose partnerships with third-party companies have left much room for improvement in reliability and reach.
However, with the announcement, F has managed to more than double its existing capacity of 10,000 fast chargers with 12,000 well-located TSLA Superchargers. Moreover, leveraging TSLA’s superior NACS charging technology is F’s attempt to ensure that it is on what Elon Musk has described as “equal footing” in its completion with the incumbent.

Secondly, opening up 12,000 Superchargers in its network of currently 45,000 connectors worldwide at 4,947 Supercharger Stations could benefit TSLA in multiple ways.

White House officials announced in February that TSLA has committed to open up 7,500 of its charging stations by the end of 2024 to non-Tesla EV drivers. The agreement with F would help the company make progress on that front.

By diversifying from being a competitor to doubling up as an infrastructure provider, the EV leader has hedged its bets to benefit from the increasing presence of legacy automakers in the electric mobility space.

While the company is expected to dominate EV sales in the foreseeable future, the revenue from its Supercharging stations, which is included under the “services and other” segment, is also expected to witness remarkable growth due to increased network utilization by non-Tesla EV drivers.

Lastly, but perhaps most importantly, this partnership could be the initiation of the strategic masterstroke that impacts the entire EV ecosystem. As discussed earlier, while TSLA uses NACS charging technology, the rest of the industry has adopted relatively-slower CCS charging.

With two-leading EV manufacturers joining hands and F being ‘totally committed’ to a single U.S. charging protocol that includes the Tesla plug port, EV strategies of other auto manufacturers, such as GM and STLA, could come under increased pressure.

According to Jim Farley, the others “are going to have a big choice to make. Do they want to have fast charging for customers? Or do they want to stick to their standard and have less charging?”

In this context, it wouldn’t be surprising if Musk’s statement, “Working with Ford, and perhaps others, can make it the North American standard, I think that consumers will be all better for it,” turns out to be the beginning of yet another victory lap for the illustrious CEO.