Several large retailers are set to release their earnings reports next week after a quarter of depressed consumer spending due to the US’ severe winter weather. Meanwhile, the world will be holding its breath in the aftermath of a succession vote in Ukraine, scheduled for Sunday. Many expect that the vote, being held by pro-Russian separatists, will drive the country to the brink of a civil war.
Key Earnings Reports
Next week investors will be waiting for several key earnings reports including Cisco Systems, Inc. CSCO, Macy’s Inc. M, Wal-Mart Stores, Inc WMT, JC Penney Company, Inc. JCP.
Cisco Systems, Inc
Cisco is expected to report EPS of $0.43, compared to last year’s EPS of $0.47.
On April 10th, Suntrust gave Cisco a buy rating with a $27.00 price target. The analysts at Suntrust cited Cisco’s product refresh as a driver for growth and expects to see the company expand in 2015.
“Refreshed Product Line, Brighter Outlook: Cisco is emerging from a broad product upgrade cycle across its core switching and routing businesses (~50% of revenue), akin to what it has done in the past, but this product transition has been a contributor to the weak results in the last few qtrs. While other factors contributed (Snowden effect in China, emg market volatility, US federal gov’t shutdown), we believe Cisco will begin a return to y/y growth in core switching & routing in the next few qtrs, and think Cisco will regain share.”
Wunderlich Securities downgraded Cisco from a buy rating to a hold rating with a $24.00 price target on April 8th, saying that they believe the market has less interest in Cisco products.
“We see more opportunity in recent valuation compression among small cap/growth stocks in networking than the implied haven of the Cisco (CSCO) market cap, but our downgrade is more than a trading call. We came away from industry interviews in recent weeks with the view that the market has less interest in the Cisco product suite than in past transitions. We see the range of alternatives for network automation/software defined networking (SDN), network function virtualization (NFV), and cloud services as dilutive to the Cisco installed base upgrade opportunity. We have trimmed our forecast moderately and with the adjustment we have reduced our 12-month target to $24 from $25. Because we view Cisco shares to be close to fully valued, we are downgrading to Hold from Buy.”
Macy’s Inc.
Macy’s Inc is expected to report EPS of $0.59, compared to last year’s EPS of $0.55.
Merrill Lynch gave Macy’s a buy rating on April 24th, saying that the company may issue debt for buybacks in the near future.
“Macy’s leverage ratio at the end of F2013 was 2.4x and its coverage ratio was 8.6x, as compared to the company’s 2.4-2.7x and 6.4-6.6x targeted ranges. Macy’s adjusted total debt rose $156mn during the year, due to its $400mn issuance, partially offset by debt pay down, including repaying $109mn of its senior debentures due August 2013. A y/y reduction in the underfunded status of postemployment and postretirement benefits also lowered F2013’s adjusted debt. Our analysis indicates the company has room to issue another $1bn of debt and still remain within its targeted leverage ratio. While we do not anticipate that management will add debt that places it at the high-end of its target ranges, we believe it will continue to take advantage of favorable credit markets to issue debt for buybacks while rates are low.”
On May 5th, Credit Suisse gave Macy’s an outperform rating with a $54.00 price target, noting that consumer spending will likely rise in the near term which could have positive effects on the retail company.
“Last week, we attended National Retail Federation Chief Economist Jack Kleinhenz's presentation at the New York Association of Business Economists. A key lesson from the presentation was the three drivers of consumer spending that the NRF pays close attention to: credit growth; wage growth; and job growth. As Kleinhenz noted, outstanding credit balances have yet to expand to the highs last seen in the 2006-2007 period, while a recent Gallup poll found that the percentage of credit card holders who say they always pay the full amount rose from 42% in 2006 to 48% in 2014, while the percentage who say they usually leave a balance fell from 27% in 2006 to 20% this year. While consumers remain wary of credit card debt, wage growth and job growth are both beginning to show signs of reacceleration, suggesting a thawing out of consumer spending ahead.”
On May 3rd, S&P Capital IQ was more conservative with a hold rating and a $57.00 price target. The analysts at S&P noted that increased customer engagement could be a driver for future growth.
“We see benefits from the successful execution of My Macy's and customer engagement strategies as well as improved confidence among M's higher-income customer base at Bloomingdale's over the next 12 months. We believe these positive factors, coupled with increased investments in its Omnichannel strategy will enable the company to drive top-line growth, while benefiting from cost reduction initiatives, in a challenging economy.”
On May 7th, Morgan Stanley gave Macy’s an overweight rating with a $60.00 price target, saying that the first quarter was likely difficult, but that the outlook was bright for the second quarter and beyond.
“1Q faced several headwinds and results could come in below consensus. But M gathered momentum in April that will likely carry into 2Q. We see high earnings achievability for FY14. Trading at 11x our/consensus FY15 EPSe, M remains our top dept. store pick. Reiterate OW.”
Wal-Mart Stores, Inc.
Wal-Mart is expected to report EPS of $1.15, compared to last year’s EPS of $1.14.
On May 3rd, S&P Capital IQ gave Wal-Mart a hold rating with a price target of $78.00, citing more conservative customer spending in the near term.
“We expect WMT's core customer to spend cautiously over the near term given government benefit reductions and job market uncertainties. However, we think downside macro risks will be somewhat mitigated by WMT's lowpriced offerings of everyday items, aggressive pricing investments and increased marketing of its value message. Longer term, we believe an acceleration in small format growth in the U.S. will help support EPS growth.”
JC Penney Company, Inc.
JC Penney is expected to report a loss of $1.25, compared to last year’s loss of $1.31.
Merrill Lynch gave JC Penney a neutral rating on April 4th, noting that deep discounts and promotional selling were responsible for the company’s declining gross margin.
“JCPenney’s gross margin contracted 190bp y/y in F2013. The company provided a detailed breakdown of what drove the decline. Increased promotional selling / clearance markdowns was the biggest factor for the gross margin decline (-217bp impact). This includes the negative impact from deep clearance markdowns taken to clear through the new brands that were not resonating with customers. Increased incremental re-ticketing costs (as the company shifts back to a promotional strategy) and reduced vendor cost concessions were also headwinds (-27bp and -6bp). Lower markdown accruals / permanent markdowns at year-end and other miscellaneous items were each a 30bp benefit to gross margins.”
On May 3rd, S&P Capital IQ gave JC Penney a hold rating with an $8.50 price target. The analysts at S&P said they expect to see the company begin to reconnect with its customers this year.
“Under CEO Mike Ullman's leadership, we think is JCP starting to reconnect with core customers. We see the company driving higher purchase conversion on apparel in its stores and on jcp.com with weekly sales promotions, the re-launch of traditional private brands that were dropped in FY 13 (e.g., St. John's women's casual sportswear), and improved in-stock positions in key items and sizes. However, we think it will take another couple of quarters for the company to regain traction in its home business through improvements in brand mix and in-store presentation. JCP is projecting over $2 billion in liquidity at the end of FY 14, including $785 million in net cash proceeds from its recent share offering.”
On May 7th, UBS shifted its rating for JC Penney from sell to neutral and upped its price target from $4.00 to $9.00. The analysts at UBS cited less risk and the opportunity for growth in the near term for their positivity.
“In our view, JCP has less "miss & lower" risk on SSS/GM's in 1H14 while lapping significant one-time drags from extremely high clearance levels—and having 19% of total sq. footage under construction—in 1H13. In our view, the stock debate shifts to 2H14, when these one-time tailwinds abate and JCP will once again be tested on whether it can drive significant traffic back to stores as YOY comparisons normalize. With many of the concerns from our Jan-13 downgrade having played out already, and less downside SSS/GM risk in the near-term, we're upgrading to Neutral from Sell.”
Economic Releases
Investors will be tuned in for US data next week, looking for further confirmation that the nation will return to steady growth in the second quarter after a bit of a stumble at the start of the year. Most expect to see April retail sales improve after March’s impressive gains. The housing sector remains a concern for the region, but analysts expect to see that housing starts rose at their fastest rate this year in April.
Daily Schedule
Monday
- Earnings Releases Expected: McKesson Corporation MCK, Concho Resources Inc. CXO, Diamondrock Hospitality Company DRH
- Economic Releases Expected: US Federal budget balance, Indian industrial production
Tuesday
- Earnings Expected: Fossil Group, Inc FOSL, CST Brands, Inc. CST, First Majestic Silver Corp. AG
- Economic Releases Expected: US retail sales, US redbook, German ZEW economic sentiment, Chinese retail sales, Chinese industrial production
Wednesday
- Earnings Expected: Cisco Systems, Inc. CSCO, Macy’s Inc M, Sony Corp Ord SNE, Kate Spade & Company KATE
- Economic Releases Expected: Japanese GDP, US PPI, eurozone industrial production, British unemployment rate
Thursday
- Earnings Expected From: Wal-Mart Stores, Inc WMT, Nordstrom, Inc. JWN, Kohl’s Corporation KSS, Flowers Foods, Inc FLO
- Economic Releases Expected: US industrial production, US CPI, eurozone GDP, eurozone CPI, German GDP, French GDP
Friday
- Earnings Expected From: Tsakos Energy Navigation TNP
- Economic Releases Expected: Japanese industrial production, French GDP, Italian trade balance, Hong Kong GDP, US building permits, US housing starts
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