Benzinga Weekly Preview: Government Shutdown Deadline Approaching

Americans may feel like they’re having deja vu next week as Democrats and Republicans in Washington race against the clock to pass a spending bill and avoid a government shutdown.

Both sides must agree on how to move forward by December 11, or they could face a partial shutdown.

However, with Obama’s latest immigration reform bill still heavily opposed by Republicans, it may turn into a bitter battle between the two parties.

Key Earnings Reports

Next week investors will be waiting for several key earnings reports including Costco Wholesale Corporation COST, H&R Block, Inc. HRB, Adobe Systems Incorporated ADBE, lululemon athletics inc. LULU and Toll Brothers Inc. TOL.

Costco Wholesale Corporation

Costco is expected to report first quarter EPS OF $1.08 on revenue of $26.90 billion, compared to last year’s EPS of $0.96 on revenue of $25.02 billion. 

On December 3, Sterne Agee gave Costco a Buy rating with a $146.00 price target, noting that the company’s structure provides some security in the retail space.

“The structural advantages/consistency of the Costco model place the warehouse club operator in the upper echelon of a choppy retail space. To this end, with: (1) consistent/ membership fee (~77%) driven net income growth, (2) above-average FCF characteristics (post self-funding for store growth), and (3) an arguably under- levered balance sheet, the case can be made for a higher payout at Costco, which currently sits at only a 1.0% yield. Below and herein we examine the company’s options, comparing COST to other consumer staple peers.”

On October 8, Credit Suisse gave Costco an Outperform rating with a $135.00 target price, noting that impressive store traffic will likely continue to buoy the company’s revenue.

“Same store sales increased 6% year-over-year (+7% ex-gas and FX), driven by growth in traffic (up +4.2%), while ticket rose as well (up +2%). Softlines and fresh food delivered high single digit comps (in part due to higher inflation in fresh food), while food, sundries, and hardlines comps rose in the mid-single digits range. Gas comps rose in the mid-single digits, despite gas prices deflating -4% year-over-year. Inventory rose 7.1% year-over-year, lower than total sales growth of 9.4%, while average inventory per warehouse rose 2%, due in part to the reintroduction of Apple products. Payables levered as a % of inventory to 100.4% from 99.7% in 4Q13.”

On November 6, Morgan Stanley gave Costco an Overweight rating with a $136.00 price target, noting that the company’s value will likely strengthen in the coming months.

“COST core comps rose 7.0% in October, with the U.S. up 7.0% and International up 6.0%. Including the impact of gasoline deflation and FX, U.S. was +6.0%, International was flat, and total company comps were +4.0%. Traffic increased 4.5%; October was the 71st consecutive month of traffic growth of at least 3.0% (average of +4.3%). Comps in discretionary categories rose mid-single digits, with particular strength in hardware, consumer electronics, and sporting goods. On a two- year stack, core comps accelerated 100 bps in October to 13%. On the negative side, gas/FX headwinds got worse sequentially from a -2% impact in September to -2.75% impact in October. Whereas FX once represented a top and bottom line tailwind next year, current FX trends may neutralize or adversely impact COST in 2015. But, it is worth mentioning that declining prices at the pump tend to be positive for gasoline margins as retail prices are usually stickier than wholesale costs.”

On November 29, S&P Capital IQ gave Costco a Buy rating with a $145.00 price target, saying that the company could increase its marketshare in the coming year.

“We expect COST to increase its market share over time, as we see it pricing aggressively to maintain a strong value proposition. With consumer confidence improving, particularly among more affluent customers, we believe the company is well positioned to benefit from it's upscale product mix. We expect the company to generate long-term earnings growth better than its peers due to global store expansion opportunities we see.”

H&R Block, Inc. 

H&R Block is expected to report a second quarter loss OF $0.41 per share on revenue of $152.42 million, compared to last year’s loss of $0.41 per share on revenue of $134.34 million.

On October 6, Credit Suisse gave H&R Block an Outperform rating with a $38.00 price target, noting that the company will not be able to close the sale of H&R Block this calendar year.

“While this news is disappointing, we believe both firms remain committed to the deal and that the regulatory delay should be taken at face value. There are a number of differences between this deal and the Republic deal, and investors should not try to apply lessons from that deal (see Exhibit 1). We note that regulators continue to work on the deal, and if they had any significant issues, they could have rejected it already. We would remind investors that the Republic deal was rejected in ~2 months. We do not believe that regulatory difficulties have changed the way either firm views the value of the deal, and both management teams have stated that they still see each other as the right partners for providing H&R Block Bank's financial services products. As a result, we believe the relevant question is a matter of when rather than if the sale will close.”

On December 1, Wedbush gave H&R Block an Outperform rating with a $40.00 price target, citing impressive  evenue growth as one reason for its optimism.

“We believe baseline revenue growth of 3-5% and double that for EPS can be supported by current trends, even before benefit of ACA and share buybacks. We see this level of growth as sustainable, with 2-3 point of pricing in assisted tax and faster growth in digital, international and financial products. Specific promising initiatives we expect to hear about at analyst day include Emerald Card, international, expat, premium stores and small business accounting.”

On November 29, S&P Capital IQ gave H&R Block a Hold rating with a $35.00 price target, saying that the company has been able to attract new customers.

“While some tax filers will choose to do their own filings due to economic necessity, we think HRB has been effective in attracting new customers with its advertising. We see financial covenant flexibility leading to potential shareholder-friendly actions, once the banking operations are sold.”

Adobe Systems Incorporated

expected to report fourth quarter EPS OF $0.30 on revenue of $1.06 billion, compared to last year’s EPS of $0.32 on revenue of $1.04 billion.

On September 17, Credit Suisse gave Adobe a Neutral rating with a $70.00 target price, noting that the company’s Creative Cloud could be a potential catalyst for growth.

“Although we are encouraged by the potential of Creative Cloud to effectively increase the annual revenue per user versus the prior perpetual licensing model, we believe much of this enthusiasm is captured in Adobe’s current valuation. Therefore, we will monitor Adobe’s ability to (1) attract new Creative users, (2) increase Creative Cloud pricing, (3) expand operating margins ahead of expectations, and (4) continue to expand into the digital marketing market before turning positive on Adobe's stock. We maintain our Neutral rating and maintain our target price of $70.”

On November 17, Morgan Stanley gave Adobe an Equal-Weight rating with a $70.00 price target, noting that there is a near term risk of falling subscribers for the company’s Creative Cloud.

“We surveyed 205 Creative Professionals regarding Adobe's Creative Cloud offerings. A large number of customers were highly satisfied with the value offered by subscriptions, and 40% of seats in the survey base have now moved to CC. However, our survey also highlighted a large population of non-adopters that plan to defer shifting for as long as possible, citing “renting versus owning” software and increased cost. Accelerating subs adds and rapid ARR growth have driven outperformance in ADBE shares in CY13 and YTD. However, we worry that these metrics could decelerate in CY15 as incremental customers are slower to migrate to the cloud, presenting a potential near-term headwind to the stock. We are also adding a $70 price target for ADBE, consistent with our prior base case.”

On November 29, S&P Capital IQ gave Adobe a Hold rating with a $66.00 price target, noting that the movement from traditional computing to cloud services will present a challenge for the company.

“We upgraded our opinion on the shares to Hold from Sell in October 2014, following a decline after quarterly results were reported. ADBE and its Digital Media users have been migrating to cloud offerings since late 2011, and we continue to see risks associated with this transition. We have seen an adverse effect on total revenues, which declined 8% in FY 13. We acknowledge a greater mix of recurring revenues. Additionally, we expect ADBE to pursue acquisitions to enhance its solutions in the Digital Marketing segment, which has been growing notably, but faces significant competition from larger software companies, in our opinion.”

lululemon athletics inc.

Lululemon is expected to report third quarter EPS OF $0.38 on revenue of $424.70 million, compared to last year’s EPS of $0.45 on revenue of $379.90 million.

On December 2, UBS gave lululemon a Neutral rating, noting that holiday sales were off to a strong start, but still cautious about the retail sector.

“Ecommerce is expected to reach 19% of Q4 sales for our group with the highest exposure at URBN (38%), followed by ANF (29%), AEO (24%), and LULU (22%). For our group, we are projecting median Q4 total comps to be flattish (vs +1% last year), driven by DTC gains in the mid-teens (vs +25% LY). In our view, LB (excluding VS Direct's non go-forward categories) will be one of the strongest direct sales growers this holiday. Within our group, URBN and GPS have been the most focused on omni- channel capabilities, but this may be overshadowed by lackluster assortments.”

On November 17, Credit Suisse gave lululemon a Neutral rating with a $42.00 price target, saying that the company’s inventory management is improving.

“Our analysis of over 4,000 lululemon SKUs on the company's eCommerce website suggests that LULU's management of inventory levels and markdowns has improved since our last report in September. Additionally, men's apparel appears to be performing well as in-stock rates declined while SKU counts continue to rise. While encouraged by these changes, we continue to see risk to revenue growth and de-leverage of fixed expenses as mature stores operating at very high productivity (>$2000/foot-plus) are struggling to stabilize their comps, suggesting that a turn in earnings power is not imminent. We also note that women's color product inventory is higher and may present risk to the margin outlook.”

Toll Brothers Inc.

Toll Brothers is expected to report fourth quarter EPS OF $0.72 on revenue of $1.32 billion, compared to last year’s EPS of $0.54 on revenue of $1.04 billion.

On November 11, Credit Suisse gave Toll Brothers a Neutral rating with a $38.00 price target, saying that the company’s September and October orders increased.

“We are raising our '15 est. to $1.95 (from $1.83), and our '16 est. to $2.60 (from $2.37). Our new ests. are driven by our increased order ests. and the lower share count following the repurchase of 2.94 mln shares in 4Q (1.6% of diluted shares, though we view this as opportunistic rather than a shift in capital allocation). The strong rebound in orders in Sept./Oct. (we est. orders ~+18% y/y) following a disappointing August (orders -7% y/y) help to alleviate our concerns around growth from Toll's core higher end buyer segment. We think TOL is well-positioned for the current overall sluggish environment given its buyers are far less affordability-constrained and less sensitive to an eventual rise in interest rates, coupled with a strong land base which should continue to support above-average gross margins.”

On November 29, S&P Capital IQ gave Toll Brothers a Buy rating with a $38.00 price target, citing increasing markets hare as one reason for its optimism.

“We have a favorable view of TOL's geographic revenue mix and high concentration of communities in the near-luxury market segment, including urban properties. We see TOL gaining market share from private luxury builders. Fiscal third quarter results at July 31 showed strong results, with a 53% year-over-year increase of revenues, a 12.5% increase of average prices, and 36% unit growth. However, TOL's July 31 backlog, in terms of units and value, showed a worse-than-peers deceleration of growth, and this could crimp future revenue growth. Despite this negative development, we view TOL's land holdings as more valuable than peers, we see backlog value as very strong, and we note that TOL, unlike peers, shys away from speculative construction.”

Economic Releases

US data will be paramount next week as investors look for more reassurance that the nation’s economy is on stable ground. Consumer sentiment figures are expected to have risen to a seven-year high in December, while retail sales in November also increased.

Daily Schedule

Monday

• Earnings Expected: Diamond Foods, Inc. DMND, H&R Block HRB, IDT Corporation IDT
• Economic Releases Expected:German industrial production, Eurozone investor confidence

Tuesday

Earnings Expected: Analogic Corporation ALOG, UTi Worldwide Inc. UTIW, Krispy Kreme Doughnuts KKD

• Economic Releases Expected: German trade balance, French trade balance, British industrial production, British manufacturing production, US redbook, Chinese CPI, Chinese PPI

Wednesday

• Earnings Expected: Cherokee Inc. CHKE, Vera Bradley, Inc. VRA, Toll Brothers Inc. TOL, Lands’ End, Inc. LE, KMG Chemicals, Inc. KMG
• Economic Releases Expected: Japanese household confidence, British trade balance, US oil inventory data

Thursday

• Earnings Expected: Adobe Systems Incorporated ADBE, Ciena Corporation CIEN, Costco Wholesale Corporation COST, lululemon athletica inc. LULU
• Economic Releases Expected: German CPI, French CPI, Italian industrial production, US retail sales, Japanese industrial production

Friday

• Earnings Expected: No notable earnings releases expected
• Economic Releases Expected: Chinese industrial production, Chinese retail sales, Spanish CPI, Italian CPI, Eurozone industrial production, US PPI, US consumer sentiment