A survey of North American equities heading in both directions
On the rise
Macy’s Inc. (M-N) crushed analysts’ estimates for quarterly profit as the department store operator’s margins benefited from better inventory management and lower freight costs, sending its shares soaring 5.7 per cent on Thursday.
The company became the latest U.S. retailer to signal improved margins from efforts to bring down inventory from 2022 highs. On Wednesday, Target (TGT-N) disclosed a 14-per-cent reduction in inventories and forecast a strong holiday-quarter profit.
“(We are) entering the holiday period in a healthy inventory position,” Macy’s outgoing CEO Jeff Gennette said in a statement.
Merchandise inventories at the Bloomingdale parent were down 6 per cent year-over-year and down 17 per cent compared to 2019.
“The retailer is seeing strength in its beauty and off-price offerings, which is helping to offset weakness in other discretionary categories,” Insider Intelligence analyst Rachel Wolff said.
Gross margins improved 160 basis points in the third quarter, driven by a 110 basis points jump in merchandise margins, also bolstered by lower markdowns within the Macy’s brand.
The company’s net sales fell for the sixth straight quarter, declining 7.1 per cent to US$4.86-billion.
Analysts had estimated a 7.9-per-cent drop, according to LSEG data.
Excluding items, Macy’s earned US$59-million, or 21 US cents per share, in the quarter ended Oct. 28, while analysts had expected the company to roughly break-even.
Macy’s raised the lower end of its full-year profit target and now expects adjusted earnings per share between US$2.88 and US$3.13, the mid-point of which was above analysts estimates. The company had earlier estimated a profit of US$2.70 to US$3.20 per share.
“The fact that Macy’s raised its full-year guidance is an encouraging sign for its business, but at the same time, consumers are showing clear signs of wanting to trade down to cheaper retailers this holiday season,” Ms. Wolff said.
Rivals Nordstrom (JWN-N) and Kohl’s (KSS-N) shares turned lower after initial gains during the trading day.
Shares of Intel Corp. (INTC-Q) rose by more than 6 per cent on Thursday, hitting their highest level in 17 months, after analysts at Mizuho Securities upgraded the semiconductor giant to “buy,” citing prospects of increased revenue from forthcoming chips and new production facilities.
Intel is set to unveil new data center and artificial intelligence chips during a “prolific product launch year” in 2024 as well as open new chip-making facilities, Mizuho analysts led by automotive and semiconductor specialist Vijay Rakesh said in an investor note on Wednesday.
Mizuho upgraded Intel’s stock to “buy” from “neutral” and raised their price target to US$50 from US$37. Intel’s shares rose as high as US$43.30, the highest since June last year. The stock has gained 63 per cent year-to-date.
“We believe INTC (Intel) is lining up significant new server product launches and foundry customer announcements in the next six months,” the analysts wrote.
On the decline
Walmart (WMT-N) raised its annual sales and profit forecast for the second straight quarter, but cautious comments from executives for the holiday season sent its shares down over 8 per cent in Thursday trading.
The company said shoppers slowed purchases at the end of October, in contrast to spending patterns earlier in the quarter, echoing comments from other retailers that have seen sales ebb.
“There’s just a flag that maybe there’s reason to be a little more cautious on the consumer given some of what we’ve seen,” Walmart’s Chief Financial Officer John David Rainey told Reuters, adding that higher interest rates and declining household finances are issues of concern.
Walmart’s bigger focus on groceries has provided a bulwark against the broad slowdown in discretionary spending. More than half of the company’s merchandise comprises of food, and other daily essentials, while at rival Target, discretionary goods take up a majority of the shelf space.
The U.S. retail giant has used its size and scale to keep prices low despite inflation, drawing in not just low-income shoppers but also more high-income consumers looking for cheaper options to stretch their budgets.
Prices on food and consumables have been “more in check” than the prior year while prices of general merchandise goods like apparel and home goods have fallen between three and six percent, Rainey said.
Inflation overall fell to about 2 per cent in the quarter for the U.S. retailer, which operates more than 5,300 stores in the United States.
While shopper visits rose 3.5 per cent in the third quarter, shoppers are “still very choiceful and using discretion” and are waiting for promotional events like Black Friday and Cyber Monday, he said, echoing comments made by Target CEO Brian Cornell on Wednesday.
Rainey said he still expected the company to “outperform relative to others in this holiday period.”
Walmart shares were down, a day after its stock hit an all-time high of $169.91 following results from rival Target (TGT-N), which projected fourth-quarter earnings above estimates.
Walmart’s shares are up nearly 20 per cent this year and are relatively more expensive than peers.
Walmart now expects fiscal 2024 earnings per share between US$6.40 and US$6.48, up from its prior forecast of US$6.36 to US$6.46.
It sees comparable sales for the full year rising 5 per cent to 5.5 per cent, compared with an increase between 4 per cent and 4.5 per cent estimated previously.
Art Hogan, chief market strategist at B Riley Wealth, said the midpoint of the company’s positive outlook missed Wall Street estimates. “As such, the stock is under a little pressure this morning.”
Sales of grocery and health and wellness products drove most of the sales in the third quarter, but Mr. Rainey also noted that shoppers bought more apparel and home goods at the chain on Walmart’s marketplace.
Comparable sales, or sales at Walmart’s U.S. stores open at least a year, rose 4.9 per cent ended Oct. 31, excluding fuel, above estimates of 3.35 per cent. Online sales rose 15 per cent.
The company posted an adjusted profit of US$1.53 per share in the third quarter. Analysts on average were expecting US$1.52 per share.
Cisco Systems Inc. (CSCO-Q) tumbled almost 10 per cent on Thursday after cuts to its annual forecasts raised fears that excess inventory with customers was sapping new orders in its mainstay networking equipment business.
The company was set to lose more than US$25-billion in market value, if losses hold, based on its share price of US$46.90, after it lowered its projections for profit and revenue for fiscal year 2024 on Wednesday.
Cisco blamed the weakness on a slowdown in orders in the first quarter, saying “customers are currently focused on installing and implementing products in their environments.”
The company, looking to diversify its business from one-time purchases of expensive equipment to more recurring software offerings such as cybersecurity packages, started fulfilling its backlog of orders this year after grappling with supply-chain issues.
“Now, they’ve exhausted their excess backlog and the business is stepping back down to lower revenue run rates,” Jefferies analyst George Notter said in a note.
“Like so many other companies, the organization is dealing with excess customer inventory – a by-product of the supply chain crunch over the past 2+ years,” Notter said.
At least six brokerages trimmed their target prices for the stock, pushing the median view down to US$54. That is nearly 70 US cents higher than the last closing price of the stock.
Cisco trades at more than 13 times its 12-month forward earnings estimates, compared with the industry median of 10.98.
With the backlog buildup and demand being weaker than previously believed, “we now see fiscal 2024 as more of a correction year,” Morningstar analyst William Kerwin said.
Palo Alto Networks (PANW-Q) on Wednesday forecast second-quarter billings below market expectations and said its billings were “impacted by the cost of money,” sending the cybersecurity company’s shares down.
Clients are cutting back on digital spending as inflation remains stubborn and borrowing costs increase.
Peer Fortinet (FTNT-Q) also projected downbeat quarterly revenue as it grapples with stiff competition and tightening consumer budgets.
Santa Clara, California-based Palo Alto forecast second-quarter billings in the range of US$2.34-billion to US$2.39-billion, compared with analysts’ expectations of US$2.42-billion, according to LSEG data.
The company expects its annual billings to be between US$10.7-billion and US$10.8-billion, compared with its prior forecast range of US$10.9-billion to US$11-billion.
Growing threats of cyber crimes, privacy concerns and high-profile hacks have in the past year supported the demand for cybersecurity products.
Palo Alto posted a 20-per-cent rise in its first-quarter revenue to US$1.88-billion, higher than average analysts’ estimate of US$1.84-billion.
On an adjusted basis, it earned US$1.38 per share in the three months ended Oct. 31, versus LSEG estimates of a profit of US$1.16 per share.
The company expects its annual adjusted profit to be between US$5.40 and US$5.53 per share, compared with its prior range of US$5.27 to US$5.40 per share.
Palo Alto earlier this month announced its intention to buy Israeli startup Talon Cyber Security as it looks to beef up its cyber security offerings to enterprises.
U.S.-listed shares of Alibaba Group (BABA-N) were down after it scrapped plans to spin-off its cloud business, citing uncertainties created by U.S. export curbs on chips used in artificial intelligence applications.
The announcement came alongside in-line second-quarter revenue from the Chinese e-commerce group, which in March had unveiled plans to carve out the cloud business as part of the biggest restructuring in its 24-year history.
The company also put on hold plans for an initial public offering of its Freshippo groceries business but said it would prepare external fundraising for its international digital commerce group arm.
Alibaba’s logistics division, Cainiao applied to list in Hong Kong in September.
“The market does not like surprises,” Thomas Hayes, chairman at hedge fund Great Hill Capital said on the X social media platform.
“Investors had hoped to receive separate shares of the cloud business in hopes the segment could achieve a higher multiple in the public markets due to its growth potential.”
Analysts had in March estimated the cloud division could be worth between US$41-60-billion but had warned that its listing could attract scrutiny from both Chinese and overseas regulators due to the reams of data it manages.
In September, Alibaba’s former group CEO Daniel Zhang abruptly quit just two months after concentrating his focus on cloud computing.
The company then appointed Eddie Wu, one of Alibaba Group’s co-founders and long-time lieutenant of former chief Jack Ma, as both CEO of Alibaba and the cloud business.
“The recent expansion of U.S. restrictions on export of advanced computing chips has created uncertainties for the prospects of Cloud Intelligence Group,” Alibaba said.
Regulatory filings also revealed on Thursday that Ma’s family trust plans to sell 10 million American Depository Shares of Alibaba Group Holdings for about $871 million.
Alibaba reported second-quarter revenue of 224.79 billion yuan (US$31.01-billion), in line with the 224.32 billion expected by analysts, LSEG data showed.
Customer management revenue from Alibaba’s commerce retail, which tracks how much money merchants provide Alibaba for placements and promotions, grew 3 per cent year-on-year.
Alibaba asked merchants to price aggressively during the country’s Singles Day festival taking on competitors such as Douyin and PDD Holdings’ Pinduoduo which have been selling lower-cost products year-round.
Alibaba International Digital Commerce (AIDC) a business that includes platforms such as Lazada and AliExpress, however reported a 53-per-cent rise in revenues, with retail revenue up 73% year-on-year. Analysts had predicted that strong international growth might help Alibaba offset a tepid domestic market.
U.S.-listed shares of Chinese firms such as PDD Holdings (PDD-Q), Baidu (BIDU-Q) and Li Auto (LI-Q) fell following “disappointing” talks between U.S. President Joe Biden and Chinese leader Xi Jinping and continued weakness in China’s property sector.
Any lift in sentiment from the meeting appeared to fade after Mr. Biden, pressed by a reporter on whether he trusted Mr. Xi, said he believed in trusting but verifying and conceded that China’s leader is a dictator.
“He is a dictator in a sense,” Mr. Biden said. A Chinese Foreign Ministry spokesperson, Mao Ning, said, “Such a remark is extremely wrong and is irresponsible political manipulation.”
Mr. Biden and Mr. Xi emerged from their first face-to-face meeting in a year vowing to stabilize the fraught relationship between the world’s two biggest economies. They showcased modest agreements to combat illicit fentanyl and re-establish military communications. Rifts on economic competition and global security threats persist, but Mr. Biden said they agreed to “pick up the phone” and talk if urgent issues arise.
The blue-chip CSI 300 Index closed down 1%, while the Shanghai Composite Index fell 0.7%. Hong Kong’s Hang Seng Index and the Hang Seng China Enterprises Index both lost 1.4%
“Market was disappointed by the talks, there is nothing beating expectations,” said a fund manager at a private fund, who declined to be named due to the sensitivity of the topic.
China’s new home prices fell for the fourth month in October, official data showed, as government support measures did little to lift the gloom hanging over the debt-laden property sector.
Data released on Wednesday also showed a sharp drop in property investments, while industrial output and retail sales continued to recover.
“China’s economic growth momentum remained largely flat in October from the previous month,” said Gavekal Dragonomics analysts. “The stabilisation is still fragile and there are significant risks ahead.”
With files from staff and wires
David Leeder