Market Realist Consumer Sector Weekly: June 12–16, 2017
Market and consumer sectors
Key news that shook the consumer sector in the week ending June 16 was Amazon’s (AMZN) $13.7 billion acquisition of Whole Foods Market (WFM). Announced on June 16, the acquisition caused Whole Foods and Amazon’s stock prices to rise 29.1% and 2.4%, respectively.
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However, news of the acquisition had a negative impact on major grocers’ stocks, which are already struggling amid tough market conditions and rising competition from online retailers like Amazon. Walmart (WMT), Costco (COST), Kroger (KR), Supervalu (SVU), Dollar General (DG), and Dollar Tree’s (DLTR) stock prices fell 4.7%, 7.2%, 9.2%, 14.4%, 3%, and 3.7%, respectively, on Friday.
The S&P 500 Index (SPY) (SPX-Index) rose 0.06% in the week ending June 16. Another key event last week was the Fed’s rate hike on June 14. However, the rate hike was already priced into the S&P 500. The Fed raised interest rates by a quarter of a percentage point—the second rate hike in 2017. Fed officials anticipate at least one more rate hike this year. Uncertainty in the markets arose after the Washington Post released news about President Trump being investigated by special counsel Robert Mueller for possible obstruction of justice.
Weak economic data were released on June 14—another event that weighed on the market last week. Retail sales for May fell 0.3%—department store sales fell 1.0%, autos fell 0.2%, and restaurants fell 0.1%.
As of June 16, the S&P 500 Consumer Discretionary Index (10.8%) has outperformed the S&P 500 Index (8.7%) and the S&P 500 Consumer Staples Index (8.7%) on a YTD (year-to-date) basis.
Target announced increased dividend
Last week, Target (TGT) announced a 3.3% increase in its quarterly dividend to $0.62 from the earlier dividend of $0.60. It will be paid on September 10 to stockholders on record as of August 16, 2017. Target is a dividend aristocrat—2017 is the 46th consecutive year that the company increased its annual dividend. To learn more, read Target’s Recent Dividend Growth Rate Says It All.
H&R Block’s dividend increased
Along with strong fiscal 4Q17 results, H&R Block (HRB) announced that its board of directors approved a 9% increase in its quarterly dividend to $0.24 per share. The company’s stock rose 14.2% last week. Its stock has risen 30.1% YTD as of June 16.
Mattel shares fell
With the intention to free-up resources for reinvestment, Mattel (MAT) announced a lower dividend of $0.15 per share on June 15—down from the previous dividend of $0.38 per share. Many brokerage firms downgraded the stock and cut its target price. The company’s stock fell 7% after the announcement. The stock fell 7% last week. Mattel stock has fallen ~25% YTD as of June 16.
Nike will reduce its workforce globally
On June 15, Nike announced that it plans to reduce 2% of its global workforce in an attempt to restructure the company and speed up more strategic initiatives it intends to pursue. Restructuring plans come amid a challenging retail environment and falling North America sales. Nike shares lost 4.4% in the week ending June 16.
Amazon to buy Whole Foods, stock rose
On June 16, Amazon announced that it entered into a definitive merger agreement with Whole Foods. Amazon will acquire Whole Foods for $42 per share in an all-cash transaction. Currently, the merger deal is valued at ~$13.7 billion, which includes Whole Foods’ net debt. Whole Foods stock rose ~20% last week. So far, its stock has risen ~39% YTD.
Kroger shares fell last week
On June 15, Kroger shares fell 18% due to the company’s weak 2017 guidance. Many brokerage firms also downgraded the stock and cut its target price. Kroger reported disappointing fiscal 1Q17 earnings and lowered its fiscal 2017 net earnings guidance to $2.00–$2.05 per diluted share. Earlier, the company forecasted earnings of $2.21–$2.25 per diluted share. Excluding fuel, the company expects its identical supermarket sales growth to be flat to 1% for fiscal 2017. The Amazon-Whole Foods deal added to the downfall of Kroger shares last week. Kroger shares lost 28% last week. Its shares have fallen 35% YTD as of June 16.
Companies fell after Amazon’s announcement
On June 16, Amazon announced its merger agreement with Whole Foods for an all-cash transaction of $13.7 billion. While Amazon and Whole Foods stock rose after the news, various other supermarkets, food producers, and retailers stock fell. Kroger fell ~28%, Costco fell 7.4%, and Walmart fell 5.3% for the week ending June 16. Pharmaceutical companies like CVS Health (CVS) and Walgreens Boots Alliance (WBA) fell 3.3% and 3.1%, respectively, last week.
Bed Bath & Beyond’s earnings could fall hard in fiscal 1Q17
After the market closes, Bed Bath & Beyond (BBBY) will announce its fiscal 1Q17 results on June 22, 2017. Analysts estimate that the company could post revenues of $2.8 billion in fiscal 1Q17, which would represent slight growth of over 2%. However, the company’s EPS (earnings per share) is expected to fall 17.5% to $0.66 in fiscal 1Q17 from its fiscal 1Q16 EPS of $0.80.
Carmax will likely announce higher revenue in fiscal 1Q18
On June 21, 2017, before the market opens, Carmax (KMX) plans to announce its results for fiscal 1Q18, which ended on May 31, 2017. Analysts expect the company’s EPS to rise more than 8% to $0.98, compared to EPS of $0.90 in fiscal 1Q17. Analysts expect that the firm could post higher revenues of $4.5 billion in fiscal 1Q18, which reflects an ~8% increase on a YoY (year-over-year) basis.
Lennar could report lower earnings in fiscal 2Q17
Lennar (LEN) will be reporting its fiscal 2Q17 earnings on June 20 for the quarter ending May 31, 2017. Analysts expect its earnings to fall ~18% for the quarter to $0.78—compared to the same quarter last year. Revenue for the quarter is expected to rise 4.6% YoY to $2.9 billion for the second quarter.
Carnival could report lower earnings
Before the market opens on June 22, Carnival (CCL) will be announcing its results for fiscal 2Q17, which ended on May 31, 2017. Analysts expect its EPS to fall 4% to $0.47—compared to its EPS of $0.49 in fiscal 2Q16. Analysts expect that the firm could post higher revenue of $3.9 billion in fiscal 2Q17, which reflects an ~5% increase on a YoY basis.
Kroger’s 1Q17 results
Kroger posted its fiscal 1Q17 results on June 15. The company surpassed analysts’ revenue estimates and met analysts’ earnings estimates. Kroger’s revenue for the quarter rose ~5% YoY to $36.3 billion. The company’s revenue in fiscal 1Q17 was higher than analysts’ estimate of $35.8 billion. The recent merger of Kroger with ModernHEALTH added to revenue growth for the quarter. EPS of $0.58 fell 17% compared to the same quarter last year. However, earnings were in line with analysts’ estimate.
H&R Block posted decent fiscal 4Q17 results
H&R Block reported its fiscal 1Q17 results on June 14. The company’s earnings rose ~19% to $3.76 per share—compared to $3.16 in the same quarter last year due to revenue growth. Earnings also beat analysts’ consensus estimate of $3.53 per share. Sales for the quarter rose 1.3% to $2.3 billion. Sales beat analysts’ estimates by 0.4%.
Analysts’ recommendations for Kroger
After a weak fiscal 1Q17 and a disappointing outlook for 2017 by Kroger, Telsey Advisory Group cut the stock’s target price from $38 to $29 and downgraded it to “market perform” from “outperform.” RBC cut the target price to $34 from $37. J.P. Morgan downgraded the stock to “neutral” from “overweight” and cut the target price from to $24 from $34. Barclays cut the target price to $25 from $33. Oppenheimer cut the target price to $28 from $38 with an “outperform” rating. Goldman Sachs cut the rating to “neutral” from “buy.” SunTrust Robinson cut the target price to $28 from $35. BMO Capital Markets cut the target price to $27 from $32. Jefferies lowered the target price to $26 from $30. Pivotal Research cut Kroger’s target price from $32 to $25. Out of the analysts surveyed, 40% rated the stock as a “buy,” 52% rated it as a “hold,” and 8% rated it as a “sell.”
Nike downgraded by J.P. Morgan
On June 16, J.P. Morgan downgraded Nike (NKE) stock from “overweight” to “neutral” after the company announced a reduction in its workforce by 2%. J.P. Morgan lowered its target price for Nike to $58 from $61. Out of the analysts surveyed, 60% rated the stock as a “buy,” 37% rated it as a “hold,” and 3% rated it as a “sell.”
Starbucks downgraded to “neutral” by Wedbush
On June 14, Starbucks (SBUX) was downgraded to “neutral” from “outperform” by Wedbush. The average target price for the stock is $66.52, which is 10% higher than the closing price as of June 16, 2017. Out of the analysts surveyed, 82% rated the stock as a “buy,” while 18% rated it as a “hold.” None of the analysts rated it as a “sell.”
Foot Locker downgraded by Argus Research
On June 12, Argus Research downgraded Foot Locker (FL) to “hold” from “buy.” Argus Research analyst John Stasza cited Footlocker’s weakening outlook for fiscal 2H18 and heavy dependence on Nike products as the reasons for Footlocker’s downgrade. Currently, ~64% of the analysts surveyed rated the stock as a “buy,” while 36% rated it as a “hold.” None of the analysts rated it as a “sell.” Read Foot Locker: Argus Research Downgraded It to ‘Hold’ to learn more.
Shake Shack upgraded by Vetr
On June 14, Vetr upgraded Shake Shack (SHAK) stock to “strong buy” from “buy” with a target price of $42.33, which represents potential upside of 12% as of the closing price on June 16. The average target price for the stock is $38.4, which is 1% higher than the closing price as of June 16, 2017. Out of the analysts surveyed, ~46% rated the stock as a “buy,” 36% rated it as a “hold,” and 18% rated it as a “sell.”
Michael Kors Holdings’ target price rose
On June 12, Cowen and Company raised the target price for Michael Kors Holdings (KORS) to $35 from $33. The average target price for the stock is $37.35, which is 8% higher than the closing price as of June 16, 2017. Out of the analysts surveyed, 11% rated the stock as a “buy,” 85% rated it as a “hold,” and 4% rated it as a “sell.”
Ralph Lauren’s target price fell
On June 12, Wells Fargo cut the target price for Ralph Lauren (RL) to $75 from $82. Out of the analysts surveyed, 5% rated the stock as a “buy,” 84% rated it as a “hold,” and 11% rated it as a “sell.”
Bed Bath & Beyond’s target price fell
On June 15, UBS reduced Bed Bath & Beyond’s (BBBY) target price to $37 from $41. Out of the analysts surveyed, 4% rated the stock as a “buy,” 73% rated it as a “hold,” and 23% rated it as a “sell.”
Raymond James initiated coverage for Delphi Automotive
On June 15, Raymond James initiated coverage for Delphi Automotive (DLPH). It assigned an “outperform” rating to the stock with a target price of $95—potential upside of 12% as of the closing price on June 16.
Credit Suisse cut the target price for O’Reilly Automotive
On June 13, O’Reilly Automotive’s (ORLY) target price was cut to $262 from $290. Out of the analysts surveyed, 70% rated the stock as a “buy,” 26% rated it as a “hold,” and 4% rated it as a “sell.”
Mattel’s target price reduced
Last week, D.A. Davidson downgraded Mattel stock to “neutral” from “buy” and the cut target price to $24 from $30. SunTrust Robinson cut the target price to $23 from $25. Monness Crespi & Hardt reduced the target price to $27 from $29, while Barclays reduced the target price to $22 from $25. Out of the analysts surveyed as of June 16, 36% rated the stock as a “buy,” 64% rated it as a “hold,” and no analysts rated it as a “sell.”
Goldman Sachs downgraded Costco to “neutral”
On June 16, Goldman Sachs downgraded Costco stock to “neutral” from “buy.” It also reduced the target price for Costco stock to $176 from $197. The move was a reaction to Amazon’s acquisition of Whole Foods. The acquisition is expected to intensify competition for Costco.