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COMPANY OF THE DAY : GAMESTOP

GameStop's stock fell in after market trading despite an earnings beat on Thursday. In a recent note we discuss why.

See Complete Analysis for GameStop
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FORECAST OF THE DAY : HOME DEPOT'S U.S. HARDWARE & SEASONAL MARKET SHARE

Home Depot has seen solid recent growth in its hardware and seasonal market share in the U.S. We expect it to level out over the long term in the 56% range.

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A Closer Look At Home Depot’s Growth Strategy
  • By , 5/26/17
  • tags: HD LOW
  • Home Depot  (NYSE:HD) had a stellar Q1 2017. The company witnessed a 5% year on year growth in revenues and a 16% year on year growth in EPS (earnings per share), beating analyst expectations. This growth is significant at a time when brick and mortar stores are losing to e-commerce sites such as Amazon.  Home Depot’s fully integrated retail channel is a key pillar of its growth. Through options such as “buy online, pick up in store” the company is creating frictionless shopping across its retail channels, driving traffic both online and in its stores.  As home spending increases with the growing economy, Home Depot is well poised to capture the growth in the industry through its strategic initiatives which are discussed in this note. See complete analysis for Home Depot’s stock Innovative Products Home Depot is collaborating with supplier partners to bring innovative and exclusive products to its stores, which is impacting the ticket size at its stores positively.  It introduced tools powered with lithium-ion battery for outdoor use and has seen an extremely positive response from customers for this convenient product.  The company is focused on products which can save time and money for its customers and this strategy is a contributor towards ticket size growth. Support Services For Pro-Customers The company’s Pro-segment is a key driver of its growth with Pro-sales outpacing the sales of the DIY (do it yourself segment). However Home Depot focuses on needs of its Pro customers beyond the traditional store offerings, which drives growth. It is focused on helping Pro-customers to manage and grow their business and connect them with DIY customers through its Pro-referral program . With better sales support and other related initiatives, Home Depot is building a relationship with its Pro-customers which helps them increase their business and drives sales for the company. Integrated Retail One of the key achievements of Home Depot in the past few years has been to grow its sales without investing in additional physical assets. Its integrated retail strategy, which seamlessly connects online and offline channels, is making its stores more efficient leading to higher revenues and profitability. (Read Here’s How Home Depot’s E-Commerce Strategy Is Driving Growth ).  The company has also observed improved customer satisfaction scores as it continues to invest in this initiative. In Q1 2017, Home Depot saw a 23% increase in online sales, which was a key driving factor for revenue growth. Online sales now account for nearly 7% of Home Depot’s total revenues, indicating that the company has made significant progress in its e-commerce initiatives. However, 45% of online orders are picked up by customers at the store, indicating that the company’s integrated retail strategy which allows customers to shop online but pick up from a store is a driving factor of its e-commerce growth. As the housing market continues its recovery, Home Depot is likely to capture this growth and drive revenues in the future. The company has a clear growth strategy in place and is focused on building a strong relationship with its Pro-customers who are likely to spend more at its stores, as construction activity continues its strong momentum. 2017 is likely to be a strong year for Home Depot. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
    LVS Logo
    Why Las Vegas Sands Is Focused On International Expansion
  • By , 5/26/17
  • tags: LVS
  • Although the Las Vegas Strip is the third-largest casino market globally, Las Vegas Sands (NYSE: LVS) derives just around 13% of its revenues from the region. The company has focused on expanding internationally, primarily in Macau and Singapore, as the Las Vegas market faced saturation and pressure on margins. The growth in the Asian casino industry, driven in large part by the rise in the number of VIP gamblers from China, created a ripe opportunity for Las Vegas Sands to grow revenues and expand its margins. LVS is also competing with other major casinos to get a contract in Japan to build new casinos. Below we discuss the company’s international expansion strategy. Las Vegas Strip Facing Saturation The Las Vegas strip is the third-largest casino market globally after Macau and Singapore. The market is fairly saturated, as competition has increased tremendously over recent years. As of 2015, there were 122 casinos in Las Vegas with total revenues of about $6.5 billion, as compared to just 35 casinos in Macau generating nearly $30 billion in revenues. This has led LVS to expand more in the international markets in order to achieve higher returns on investments. As can be seen in the below table, only about 10% and 15%, respectively, of LVS’s tables and slots are at its Las Vegas casinos. However, the number of hotel rooms at LVS’s Las Vegas operations stands out among its international hotel operations. In addition to hotel rooms, LVS’s Las Vegas business also consists of about 2.3 million square feet of convention space, almost double the area of its convention space in Singapore. The relatively higher margins from the hotel and convention business, as well as steady growth in business conventions in Las Vegas, can be attributed to LVS’s high resource allocation to these businesses. This is also reflected in LVS’s revenue stream in the Las Vegas area, as about 75% of its Las Vegas revenues come from the hotel, food and convention business. Macau Growth Offered Strong Opportunity Macau’s gaming industry has seen significant growth over the past decade. The market sees a very high concentration of VIP gamblers, which benefits LVS as margins from VIP gambling are generally higher than Mass Market gaming. Due to its consistent investments in Macau, Las Vegas Sands is among the biggest players in Macau. LVS consistently looks to expand in underpenetrated markets to increase its ROI, with the recent example being Singapore. Additionally, after the legalization of casinos in Japan in 2016, LVS is competing with other major casinos to build new casinos in Japan. As can be seen in the table above, LVS’s margins from its Las Vegas operations are significantly lower than its Singapore or Macau operations. This can be primarily attributed to high margins from VIP gambling in Singapore and Macau, as well as the high ADR (average daily rate) of Singapore Hotels. View Interactive Institutional Research (Powered by Trefis): Global Large Cap  |  U.S. Mid & Small Cap  |  European Large & Mid Cap More Trefis Research
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    Does Ford’s New CEO Indicate A Change In Strategy?
  • By , 5/26/17
  • tags: F GM TSLA
  • In a sudden move, Ford Motors  (NYSE:F) appointed Jim Hackett as its CEO (Chief Executive Officer) replacing Mark Fields, a 28 year old veteran with the company. According to the company, the three key priorities of the new CEO would be to sharpen operational execution, modernize Ford’s present business, and transform the company to meet future challenges. Prior to being promoted as CEO, Jim Hackett was the head of Ford’s mobility division, since March 2016. As the automotive industry undergoes a significant transformation, with increased focus on clean energy vehicles, autonomous vehicles, and a shift towards ride sharing instead of vehicle ownership, Ford’s management change appears to be aimed at accelerating its strategy towards capturing these new opportunities. The company has already defined itself as an automotive company and a mobility solutions provider and is working on several initiatives in the mobility space. We believe this change in management is aimed towards ensuring that the pace of these initiatives is rapid to ensure that the company has a competitive edge in the new automobile landscape. Increased Focus On Autonomous Vehicles While several investors believe that Ford has not done enough to build a competitive edge towards the new automotive landscape dominated by autonomous cars, the company is investing heavily in technology to bring these cars on the road soon. Its 2021 target to launch a fully autonomous vehicle might be behind peers, but the company is focusing on Level 4 technology (fully autonomous cars) to achieve this goal, where other players are investing in Level 3 technology where regulatory approvals are easier but the vehicle is not fully autonomous. (Read Here’s Why Ford Is Investing In Argo AI ).  This indicates that the future of autonomous cars is uncertain since there are several concerns around the safety of these vehicles and different technologies which can be used to make the vehicles autonomous and safe. Ford is banking on regulatory approvals and if these are received for its technology, it could put the company ahead of other players.  A new CEO who is focused on these initiatives can help accelerate the process, but a disruptive transformation of the company is unlikely. Other Changes Needed For Future Growth Organizational behavior experts believe that a new CEO is not sufficient for a company’s transformation and CEOs who try to radically transform a company are most likely to fail. Further, the success of a company depends on its internal structure and market related forces, some of which the CEO cannot directly control. While its new CEO can ensure that Ford is focused on initiatives which will give it a competitive edge in the new automotive landscape, this change alone is unlikely to bring about a significant improvement in the company’s performance. As technology takes center stage in the new automotive landscape, it is challenging for a traditional automaker to compete with companies such as Tesla, Apple, and Google in the autonomous cars initiatives. Similarly, technology companies are unlikely to have the expertise to scale up manufacturing. It is likely that a combination (potential mergers) of these entities that have expertise in two different areas of the “new automobile” would be the best approach for the future. Ford’s sudden change in CEO does indicate that the company is looking to accelerate its initiatives towards newer technologies and emerging opportunities to build a competitive edge. However, this change might not be sufficient for the company to succeed in the new landscape and several other strategic efforts by the new CEO will be required to drive growth in the long term.   View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
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    Here’s Why Chipotle Appointed A “Chief Restaurant Officer”
  • By , 5/26/17
  • tags: CMG DNKN MCD
  • As it works to improve its restaurant operations and regain the confidence lost due the E. coli virus, Chipotle Mexican Grill  (NYSE: CMG) is hiring senior officials to augment its leadership team. Recently the company appointed Scott Boatwright as its Chief Restaurant Officer with the responsibility to supervise restaurant operations in its North American restaurants. This move comes after the company’s CFO mentioned in a recent interview that its staff was distracted and not serving customers as per expectations. Focusing on employee related initiatives to improve its services has been one of the key priorities for Chipotle and appointing a Chief Restaurant Officer appears to be a related initiative.
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    Elevated Bank Failure Figure For 2017 So Far Is Not A Cause For Concern
  • By , 5/26/17
  • tags: BAC C JPM USB WFC UBS
  • Data compiled by the FDIC about U.S. bank failures shows a rather discomforting trend: 5 U.S. commercial banks have failed so far in 2017 – equaling the total number of bank failures for full-year 2016. This includes the failure of New Orleans-based First NBC Bank in late April. This single bank failure is expected to cost the FDIC more than $1 billion – making it the most expensive bank failure since two Puerto Rican banks went belly up in the aftermath of the economic downturn. While the sudden increase in the number of failed banks is definitely not good news, we believe that there is no reason to push the panic button. The recent trend appears to be a side effect of the Fed’s decision to steadily hike benchmark interest rates, as the banks that failed were primarily those that catered to low- and middle-income customers. This is because higher interest rates are likely to trigger loan losses for these banks as customers fall behind on their repayments. While this means that the trend may continue as the Fed sticks to its rate hike policy, overall improvement in profits for the industry and an increase in consolidation will very likely keep failure rates low.
    VZ Logo
    Does Verizon Have A Shot At Success In The Streaming TV Market?
  • By , 5/26/17
  • tags: VZ S TMUS T
  • Verizon’s  (NYSE:VZ) CEO recently indicated that the carrier plans to launch its own over-the-top (OTT) streaming TV service later this year. The move is not surprising, as video has been a major theme in the wireless business for some time now. Carriers have been looking to leverage the increasing shift of consumer media habits away from traditional media to mobile devices, while creating more compelling use-cases for their upcoming 5G networks, which will enable more seamless video delivery. Below we take a look at some of the challenges and opportunities Verizon could see as it looks to enter the small but growing market. We have a  price estimate of $53 for Verizon’s stock, which is about 15% ahead of the current market price. See our complete analysis for   Verizon  |  AT&T | T-Mobile |  Sprint   Risks: Strong Competition And Verizon’s Mixed Media Track Record The nascent streaming TV market is already quite crowded, with major pay TV companies as well as technology firms vying for share. For instance, YouTube TV is banking on Google’s tech muscle (cloud DVR, AI-powered search and recommendation system) and its sizable Android platform to win over customers. Apple is also widely expected to enter the market, leveraging its sizable iOS user base. Verizon’s rival AT&T entered the market late last year with DirecTV Now, banking on relatively attractive content deals. However, the product has apparently been slow to gain momentum, with growth reportedly stalling  shortly after the initial promo period. This could raise some questions regarding the viability of Verizon’s entry into the market. The company’s track record in the media space has been somewhat mixed. The go90 over-the-top video app that it launched in late 2015 hasn’t been very successful, despite well-reviewed original content offerings. Moreover, the carrier could lack bargaining leverage with content providers, given its smaller exposure to the U.S. pay TV market. Its FiOS IPTV service has under 5 million customers, compared to AT&T’s ~25 million pay TV subscribers. Opportunities : Video Advertising Tech And Original Content Could Help Verizon Verizon has been making a concerted push into the mobile advertising and video markets over the last two years, investing in Internet TV providers (OnCue), content delivery networks (Edgecast) and advertising technology providers (AOL). The carrier could potentially deploy some of these technologies into its streaming TV foray. Verizon also has a vast library of original video content, on account of assets such as AOL and the go90, and this could get bigger with its acquisition of Yahoo, which is expected to close next month. The company could potentially bundle this content with the live TV offering, allowing it to offer some differentiation over other players who do not offer original content. Verizon could find a way to also bundle its NFL live game videos (it currently holds mobile rights for NFL) into the mobile app of the TV service. The carrier will can also cross sell the offering to its existing 110 million+ wireless subscribers, offering discounts for wireless and streaming TV bundles. This could help to improve stickiness as well as overall ARPU. View Interactive Institutional Research (Powered by Trefis): Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap More Trefis Research
    GME Logo
    Key Takeaways From GameStop's Q1 Earnings
  • By , 5/26/17
  • tags: GME ATVI EA
  • GameStop  (NYSE:GME) reported healthy first quarter results that were driven by strong Nintendo Switch sales and strong performance in the international markets. The company posted first quarter adjusted EPS of 63 cents, 12 cents higher than market expectations, as well as net revenues of $2.05 billion, which were up 4% year-over-year (y-o-y). Comparable store sales increased 2.3% for the first quarter, primarily due to strong performance in the international markets. In the first quarter, GameStop’s hardware sales rose more than 24%, primarily due to better than expected Nintendo Switch sales. Per the company, the Nintendo Switch has been able to outsell Nintendo Wii by 10% within two months of each’s respective launch. Software sales continue to decline y-o-y (down 8%), primarily due to lower physical sales of games. The video game market remained soft due to declining demand for previous generation consoles and a relative weakness of game titles launched in the holiday season. Another noteworthy trend is the decline in sales of pre-owned games, revenues from which dropped 6% y-o-y. These appear to be the primary reasons behind the company’s performance during the quarter. However, GameStop’s non-gaming business continues to perform well, with technology brands and collectibles registering 21% and 39% growth in revenues, respectively. Higher selling, general and administrative (SG&A) costs resulted in a decline in the company’s operating profit, which dipped more than 11% over the prior year period to $101 million. The rise in SG&A was primarily due to increased sales in the Technology Brands division. GameStop’s Collectibles segment continues to perform well for the company, in line with its expectations. The company expects Collectibles to continue to perform well and is making a host of changes in order to facilitate the segment’s growth. The company plans to spend a significant portion of its capex (projected to be in the range of $110 million to $120 million) for restructuring 50 of its larger stores in the U.S., allotting half of the total retail space to collectibles.  Additionally, the company plans to enter into licensing agreements with major brands in order to expand its growing segment. Going forward, GameStop expects to stem the decline in revenues and expects to post a marginal increase in revenues in 2017. However, the company expects comps to remain difficult. For the full year, the company expects to generate EPS in the range of $3.10 to $3.40, primarily due to growth in Tech Brands and Collectibles along with strong sales of the Nintendo Switch. See More at Trefis  |  View Interactive Institutional Research  (Powered by Trefis) Get Trefis Technology
    COST Logo
    Costco Beats Q1 Estimates On Higher Comp Sales
  • By , 5/26/17
  • tags: COST WMT
  • Costco (NASDAQ:COST) reported solid fiscal third quarter results on Thursday, May 25, as both its revenues and earnings came in ahead of consensus estimates. Key Takeaways From Costco’s Q3 Earnings: Costco’s overall revenue increased 8% year-over-year (y-o-y) to around $29 billion in third quarter, driven by incremental revenues from new stores, growth in membership fees and a 5% increase in comparable sales. During the same period, Costco’s membership revenue grew 4% y-o-y to $644 million, due to sign-ups at existing and increased penetration of the company’s higher-fee Executive Membership program. In addition, executive members represented around 38% of the company’s member base in the quarter. Currently, Costco’s member renewal rates are 90.2% in the U.S. and Canada and 87.5% worldwide. On the e-commerce front, online sales grew 11% y-o-y in this quarter. On the cost side, Costco’s selling, general and administrative (SG&A) expenses increased 6.4% y-o-y to around $3 billion due to increased payroll expenses, higher IT expenditures and growth in e-commerce initiatives. In terms of capital expenditures, the company spent $538 million in this quarter, and close to $1.72 billion year-to-date. Going forward, the company expects the expenditure to be in the range of $2.6-$2.7 billion for the fiscal full year. The company reported net earnings of $1.59 per share, up 28% y-o-y. The Citi Visa co-branded credit card program positively impacted the bottom line by $0.14 a share, while gas profits in the quarter increased y-o-y by $0.05 a share. This quarter’s EPS included a $0.19 per share income tax benefit in connection with the $7 per share special cash dividend that the company declared on April 25th. In the third quarter, Costco’s comparable store sales increased by 5%, including the impact of gasoline prices and currency effects, showing solid growth across all geographies. It should be noted that the strengthening dollar and gasoline effects did not have a major impact on the company’s earnings for the quarter, as the company also saw 5% growth on a comparable basis excluding these factors. Further, this 5% reported comparable sales growth was a combination of an average transaction increase of 2% and an average shopping frequency increase of a little over 3%.  In Q3, the retailer opened 2 new stores, and plans to open a total of 12 more stores in fiscal 2017. On the categories, hardlines (tires, hardware, health and beauty aids) and softlines (apparel, house wares) grew in mid single-digits, fresh food was up low single-digits, while consumer electronics and tobacco were down in the quarter. Costco did not publish guidance for the current quarter, but consensus estimates for the company’s fiscal fourth quarter call for earnings of $1.98 per share and revenues of $41.04 billion, implying growth of about 12% and 15%, respectively. Costco’s membership fee increase will be going into effect from June 1. According to management, the company will hike the price of its Gold Star membership by $5 per year to $60, and raise its Executive membership fee to $120 from $110. In addition, the company reported that the maximum annual 2% reward associated with the Executive membership will increase from $750 to $1,000. The retailer last increased its membership fee in November 2011. Costco reported that 2 million new cards (1.5 million new approved member accounts) have been added since the launch of Citi cards (June 2016). Have more questions about Costco? Please refer to  our complete analysis for Costco Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap | More Trefis Research
    BBY Logo
    Best Buy Beats Q1 Estimates On Growth In Gaming, Better-Than-Expected Mobile Sales
  • By , 5/26/17
  • tags: BBY WMT TGT AMZN
  • Best Buy ‘s (NYSE:BBY) stock surged more than 11% after the announcement of its better-than-expected first quarter results, as both its revenue and earnings per share came in ahead of market expectations. The company’s stock reached $61.25 on Thursday, which marked a 43% increase year-to-date. Key takeaways from the Q1 results are below: Best Buy’s revenue grew 1% year-over-year (y-o-y) to around $ 8.5 billion, primarily due to an enterprise comparable sales increase of 1.6%. This growth was driven by strong performance in gaming, and better than expected results in mobile, primarily due to new unlimited data plan offers from many carriers, which generated increased demand across devices. In addition, the improvement in overall sales trends within the quarter due to the arrival of delayed federal tax refund checks also aided in this growth. Best Buy’s domestic segment’s revenue increased 1% y-o-y to $7.9 billion, as the domestic comparable sales grew 1.4%, driven by strength in computing, connected Home and gaming, partially offset by continued softness in tablets. On the e-commerce front, the company’s online revenue was nearly 13% of the total domestic revenue compared to 10.6% in Q1 fiscal 2017. Moreover, the domestic comparable sales grew 22.5%, driven by conversion and traffic. In the international segment, the company’s revenue increased marginally to o $616 million, driven by comparable sales growth of 4%, driven by continued growth of online revenue in Canada and Mexico The company’s non-GAAP gross profit increased 3% y-o-y due to improved margin rates across categories such as appliances and home theater. The retailer reported higher-than-expected non-GAAP EPS of $0.60, up 40% y-o-y. This strong bottom line performance was driven by better performance in the domestic business along with lower SG&A and a higher gross profit rate. For the second quarter, Best Buy expects its sales to benefit from the positive category momentum from the first quarter. As a result, the company expects its total revenue to be in the range of $8.6-$8.7 billion in the second quarter. It also expects domestic comparable sales growth in the range of 1.5% to 2.5%, and adjusted earnings per diluted share of $0.57 to $0.62 for the company. For the full year fiscal 2018, the company raised its guidance to reflect the better-than-expected first quarter results, and now expects revenue growth of approximately 2.5% compared to the prior outlook of approximately 1.5%. It also expects full year non-GAAP operating income growth of 3.5% to 8.5% versus its original outlook of 1% to 3% growth. Have more questions about Best Buy? Please refer to  our complete analysis for Best Buy  See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
    RIO Logo
    Rio Tinto Looks To Lower Debt Amid Uncertainty In Iron Ore Prices
  • By , 5/26/17
  • tags: RIO VALE MT CLF
  • Rio Tinto has announced plans to further lower its debt burden, as it looks to strengthen its balance sheet amid an uncertain iron ore pricing environment. The company announced plans to buy back $2.5 billion of outstanding debt earlier this week. The company has been trying to lower its debt burden over the past couple of years due to a business environment characterized by weakness in iron ore prices. Under the simplifying assumption that the company is able to meet its business expenses from its operating cash flows and existing cash balances, the following table indicates the extent to which the company will have lowered its debt by year end. (The debt figures indicate year-end or projected year end gross debt balances.) The following chart illustrates the trajectory of iron ore prices over the past year. (Source: Iron ore price drops to 7-month low, Mining.com ) Iron ore prices rose sharply in the fourth quarter of last year and the first quarter of this year driven by a favorable demand outlook from China and the U.S.  A fiscal stimulus instituted by the central government in China targeting the infrastructure sector raised the demand outlook from China whereas Donald Trump’s electoral victory raised the prospects of higher demand from the U.S. driven by his business-friendly legislative agenda. However, prices of iron ore have fallen sharply in recent months as demand growth in China, the world’s largest market for iron ore, has shown signs of faltering. Though Chinese imports of iron ore have continued to remain at elevated levels, the country’s stockpiles of the commodity have reached record levels indicating that the underlying demand growth is perhaps not keeping pace with the expansion in supply. Moreover, there are concerns over the sustainability of China’s debt-fueled (mainly domestic debt) economic growth, with Moody’s downgrading the country’s sovereign debt rating for the first time in nearly thirty years. Given the concerns over the sustainability of demand from the world’s largest consumer of iron ore, Rio Tinto’s move to shore up its balance sheet would stand the company in good stead in case of a further decline in prices. Have more questions about Rio Tinto? See the links below. Recent Decline In Iron Ore Prices Weighs On Rio Tinto’s Stock Price Iron Ore & Crude Oil: The Similarities & Differences In The Market Dynamics Of These Commodities Notes:
    ANF Logo
    Sales Slide Continues For Abercrombie
  • By , 5/26/17
  • tags: ANF AEO GPS URBN
  • Abercrombie & Fitch  (NYSE:ANF) reported a decline in sales and earnings in its first quarter, in line with the company’s expectations. The sales fall of 3.6% beat expectations, but the earnings decline to -$0.91 missed by 21 cents. Comparable sales fell to 3%, topping the expectations of a decrease of 3.6%, helped on by the outperformance of Hollister, which increased its comps by 3%. However, the namesake brand, Abercrombie, continued its free-fall, with comps plummeting 10%. A promotional environment and store traffic headwinds are an industry-wide headache, and ANF was no exception. Excessive discounting wreaked havoc on the gross margins, which were 130 basis points lower than in the corresponding quarter last year. Meanwhile, reduced store traffic necessitates the existence of a seamless omni-channel presence. In this regard, ANF has undertaken substantial effort and investment, which seems to be paying off, as DTC (Direct-to-Consumer) revenues increased to constitute 27% of the total revenues, up from 24% in the first quarter of last year. Focus On DTC Channel Amidst the news that Abercrombie is fielding takeover interest from prospective buyers, including American Eagle, CEO Fran Horowitz is looking to fix the company’s operations. One avenue of long-term growth is the company’s online business. A fundamental shift from brick-and-mortar to the online platform is evident, and retail companies have to embrace this trend in order to be relevant. Keeping this in mind, ANF has integrated its abercrombie and kids websites, and optimized it for mobile, payment, and tracking. The full omni-channel offering has been rolled out in the US, Canada, and the UK, with plans to roll-out internationally through the remainder of 2017. The focus on its digital presence has been appreciated, with Abercrombie coming in at fourth in a ranking of 100 publicly traded retailers having an omni-channel presence, conducted by Total Retail. On a more sobering note, A&F’s sales slide has continued, with the brand struggling to attract customers. It has not been able to overcome the challenges posed by the apparel market, which has resulted in a slower than expected progress of the brand revitalization plans. The company’s flagship and tourist stores weighed heavily on the results, as a result of the persisting traffic headwinds. More Store Closures To Come In 2017, the company expects to close approximately 60 stores in the US through natural lease expirations. Additionally, with about 50% of the US leases expiring by the end of FY 2018, the company has significant flexibility to strike the right store count balance, and drive efficiency by remodeling or resizing the stores, renegotiating leases, or shuttering down. This closure follows the 53 other shops that were shut in FY 2016, and the many others closed in the years prior. In theory, the company’s comparable sales should show an improvement when the unprofitable stores are closed down. However, in the past at least, such closures have not resulted in an improvement in sales. See our complete analysis for Abercrombie & Fitch Have more questions about Abercrombie & Fitch? See the links below: Can 2017 Be A Good Year For Retail Stocks? Part 2: Is There A Way Out Of The Rut For Brick And Mortar Stores Retailing Conundrum, Part 1: Is There A Way Out Of The Rut For Brick And Mortar Stores? Abercrombie & Fitch’s Direct Business Is Its Only Beacon Of Hope Notes: Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap | More Trefis Research
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    NetApp Earnings: Strategic Product Sales Help Drive Revenue Growth, Profits
  • By , 5/25/17
  • tags: NTAP HPE IBM WDC STX
  • NetApp (NASDAQ:NTAP) announced its fiscal Q4 earnings on May 24, reporting a solid 7% increase in net revenues to just under $1.5 billion. Revenues were higher than the mid point of the guidance provided by the company at the end of the previous quarter, while gross margins were considerably higher. NetApp’s non-GAAP gross margin for the quarter stood at 62.5%, which was 140 basis points higher than the year-ago period. Higher revenues and healthier margins were largely due to strength in the company’s strategic solutions, which make up roughly 70% of product sales. Additionally, NetApp’s non-GAAP operating profit margin was over 7 percentage points higher than the comparable prior year period at 20.2% (the guidance was 19%). Operating profit was up primarily because the company “overachieved” its cost-reduction target for the quarter and was able to report savings of $130 million on an annualized run rate basis. Resulting earnings per share stood at 86 cents per share, which was over 50% higher on a y-o-y basis as shown below. Unlike previous quarters, revenue growth came from product sales rather than software maintenance or services segments. Storage product sales were up by 13% year-over-year to $852 million. Within the product division, strategic product sales were up 24% y-o-y to $596 million while mature product sales were down 6% to $256 million. A significant portion of strategic products included NetApp’s all-flash array, which accounted for over $400 million in sales for the quarter. On the other hand, higher product sales during the quarter presumably impacted hardware maintenance revenues, with customers purchasing new hardware spending less on maintenance of existing hardware. Correspondingly, revenues from hardware maintenance support contracts were down 1.5% to $313 million. Professional services and post-sales services revenues were up by a steady 4% to $75 million. Given that the company has a high installed base and a healthy attach rate, hardware maintenance revenues could pick up in subsequent quarters. NetApp’s Software Entitlements and Maintenance revenues were up 3% y-o-y to $240 million. This trend has been consistent through 2016, with revenues growing by low single digits in each of the last few quarters. The growth in new and strategic product sales led to healthier gross margins for the product division. As a result, the product gross margin (non-GAAP) was over two percentage points higher on a y-o-y basis to 48.9% for the quarter. However, over the course of the year, a fall in selling prices for hardware products led to lower margins due to which full year gross margins for the product division were down almost 3 percentage points to 47.4% for fiscal year 2017. Comparatively, the services and software maintenance businesses have both reported improvement in gross margins through the year. Keeping up the trend, software maintenance gross margin was over a percentage point higher at 97.5% while hardware maintenance & services gross margin was 240 basis points higher than the year ago period at 70.3%. Last year NetApp’s management indicated that the company will take steep cost cutting measures to improve early last year that it would cut 1,200 jobs to enhance profitability. This led to an improvement in the operating margin through the last year. The company further initiated cost reduction measures starting in November to reduce around 6% of its global workforce. This helped NetApp save around $130 million on an annualized run rate basis. For the fourth fiscal quarter, NetApp’s operating profit margin (non-GAAP) stood at 20.7%, which is over 7 percentage points higher than the previous year quarter. Consequently, its net income per share could improve by around 56% y-o-y to 86 cents per share. Netapp’s management has given conservative guidance for the current quarter. Net revenues are forecast to increase by a modest 2% to $1.32 billion in the first fiscal quarter while gross margin may be flat over the prior year quarter. The operating margin is forecast to improve by over 5 percentage points to 19%, leading to robust growth in diluted earnings per share as shown above. See our complete analysis for NetApp View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Guess' Growth Strategies And International Market Focus Are Ensuring Its Steady Recovery
  • By , 5/25/17
  • tags: GES ANN ANF LB
  • With an eye towards expansion in the European and Asian markets and decreasing its presence in the American markets, Guess is making a healthy recovery in its performance with each successive quarter. The company’s strategic plans are progressing well. Its supply chain initiatives improved the cost structure resulting in an estimated saving of $24 million in Q1 FY 2018. The company’s brand positioning is focusing on a more authentic connect with the millennial and Gen Z buyers. Finally, it is expanding its digital footprints by transitioning its entire gamut of websites into a state-of-the-art responsive site, which will improve the user experience with faster speed and less navigation steps. It is also upgrading its omni-channel capabilities and it continues to partner with marketplaces such as Tmall, JD, and vip.com in China, La Redoute and Otto in Europe, and Amazon in the U.S. and Canada. For the first quarter of fiscal 2018 (fiscal year ends in January), Guess’ top line grew by 2% which is a considerable recovery from its 6% revenue decline in Q1 FY 2017. Americas’ Contribution Will Keep Declining As we had mentioned in our earnings preview for Guess, the contribution of its American markets in its revenues is gradually declining while the contribution of Europe and Asia are increasing. The company is currently shutting down stores in the Americas where footsteps have been declining in the brick-and-mortar stores. Guess plans on achieving a 7.5% overall long term operating margin. Its profitability is currently being dampened by the weak American markets. Also, the company is currently thinking more in terms of markets in specific regions rather than the regions themselves. For example, in Europe, Guess has over 20 markets, with a lot of untapped potential in some of the Eastern European markets. In Asia, Guess’ two main markets are Korea and China. Out of its 35 new store openings in fiscal 2018, most of it will happen in China. The company is also tapping the huge e-commerce marketplace in China through Tmall, JD.com, and vip.com.   Wholesale Business Guess’ overall wholesale business is growing in a healthy way, especially in the European region. The productivity and profitability of its wholesale dealers are improving, thus ensuring better business for Guess as well. Also, in Americas the wholesale business is doing better than the retail business, especially in markets like Canada and Mexico, where the wholesale business has shown impressive growth. Notes: See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    U.S. Steel Looks Set To Miss Out On The Resurgent Demand For Steel
  • By , 5/25/17
  • tags: X MT
  • The past few weeks saw two major steel companies, U.S. Steel and ArcelorMittal, release their first quarter results. However, there was a stark contrast between the results of both of these companies, specifically their U.S.- based operations.  While ArcelorMittal’s NAFTA business division reported a 93% year-over-year increase in its operating income, U.S. Steel’s Flat-rolled division reported an operating loss in Q1 2017, which was soon followed by a change in leadership with the company’s CEO stepping down. ArcelorMittal’s operations benefited from a considerable improvement in the business environment for steel companies in the U.S. whereas U.S. Steel was unable to profit from the same. U.S. Steel attributed its poor Q1 performance to a renewed focus on its asset revitalization program, which is aimed at boosting the reliability and operating efficiency of its U.S. operations. However, the implementation of the asset revitalization program could mean that U.S. Steel is unable to profit from the favorable prevailing business conditions as the company’s competitors make hay while the sun shines. A Revival in Fortunes for the Steel Industry The U.S. steel industry has been adversely impacted by competition from unfairly traded steel imports over the past few years. Imported steels sold at unfairly low prices adversely impacted both realized prices and shipments for domestic steel producers. Based on petitions from the domestic steel industry, the Department of Commerce imposed antidumping duties over the course of 2016 on steel imports from countries that it determined were indulging in unfair trade, including major sources of steel imports such as China and South Korea. Subsequently, as a result of weakening competition from unfairly traded imports, steel prices improved substantially, with U.S. Steel’s Flat-rolled division reporting an 18% year-over-year increase in realized prices in Q1 2017. Our pricing forecast for the Flat-rolled division reflects the much-improved pricing environment. In addition, if the federal government is able to implement its legislative agenda, specifically its infrastructure plan and tax reform, the demand for steel and the business environment for steel companies could become even more favorable. However, U.S. Steel could be in danger of missing out on this opportunity. Is U.S. Steel Missing Out? U.S. Steel’s Flat-rolled division reported a 4% year-over-year decline in shipments in Q1 2017 as the implementation of the asset revitalization program forced the company to lower production levels. However, the timing of the decision to vigorously pursue the asset revitalization program seems to be extremely inopportune. The company management has stated that the asset revitalization process would take three to four years to implement completely, which is likely to result into three to four years of subdued shipment volumes. As steel is a cyclical industry, this could mean that the company misses out on the entire prevailing phase of rising demand for the commodity. While there isn’t a convincing reason for the company’s decision to undertake the upgrade of its facilities at this point in time, one can only speculate that the management has taken such a decision because it had no other choice, since otherwise it would have deferred the asset revitalization program in order to profit from prevailing business conditions. This would imply that the company’s facilities are plagued by long-standing reliability issues, which were perhaps also manifested in the unplanned production outage of Q3 2016, which lowered production volumes by 125,000 tons. Several successive years of unfavorable business conditions in recent times have prompted U.S. Steel to lower capital spending in order to conserve cash. U.S. Steel’s capital expenditure from 2013-2016 averaged roughly $426 million per annum, around 41% lower than in 2012. The need to conserve cash flows perhaps prevented the company from investing adequately in the maintenance and upgrade of its facilities in recent years. At any rate, the company’s Q1 2017 disclosures about its asset revitalization program took market participants by surprise. The question now is, can the company quickly turn its fortunes around to take advantage of the prevailing business conditions? This is a question which isn’t easy to answer since there isn’t a great deal of clarity about the extent of the company’s operational issues. However, given that these operational issues seem to be of a long-standing, structural nature, it does not seem likely that shipments would revert to normal levels anytime soon. As per the company’s own estimates, it could take three to four years to fully implement the asset revitalization program. Even if the company were to adhere to its stated schedule, we are still looking at a lost opportunity to substantially increase shipments in response to rising demand. Our latest shipment forecast for the U.S. Flat-rolled division reflects the moderating effect of the asset revitalization program. Thus, U.S. Steel could be about to lose out on an opportunity to take advantage of the rising demand for steel, one that its competitors look set to profit from. Have more questions about U.S. Steel? See the links below. Underperforming Amid Favorable Business Conditions: The Curious Case Of U.S. Steel U.S. Steel’s Q1 2017 Earnings Review: Unexpected Decline In Flat-Rolled Shipments Weighs On Results Notes: See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology      
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    Tata Motors' Annual Results Impacted By Unfavorable Currency Translations
  • By , 5/25/17
  • tags: TTM TM GM F VLKAY DAI DDAIF BMW TSLA
  • Have more questions on Tata Motors? See the links below. Tata Motors: Earnings Review Tata Motors’s Q2 Results Were Marred By FX Revaluation And Hedging Losses Three Reasons Why Trefis Is Bullish On Tata Motors Tata Motors’ India Business Is Heading In A Positive Direction Tata Motors’ 50% Drop In Profits In Q1 Is Not All Bad News Brexit Could Be Good Or Bad News For Jaguar Land Rover New Compact Models Boost Jaguar Land Rover’s First Half Volumes Jaguar Land Rover Steps Up Unit Sales In Crucial Markets Where Does Jaguar Land Rover Stand Relative To The German Top 3 In Crucial Markets? Why Jaguar Land Rover Forms More Than 90% Of Tata Motors’ Valuation Notes: Get Trefis Technology
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    Lowe's Unable To Match Up To Home Depot's Solid Q1 Performance
  • By , 5/25/17
  • tags: LOW HD
  • Have more questions on Lowe’s? See the links below. Home Depot Or Lowe’s- Who Is Operating More Efficiently? Lowe’s Steps Up Its Canada Operations With RONA Acquisition Home Depot Or Lowe’s — Which Retailer Is Doing Better In 2016? Home Depot Vs. Lowe’s – Who Is Better At Inventory Management? Lowe’s Riding On Strong Customer Spending On Home Improvement; Beats Home Depot’s Comps In Q1 Where Will Lowe’s’ Revenue And EBITDA Growth Come From Over The Next Three Years? Notes: Get Trefis Technology
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    Will The Delay In Chesapeake Key Targets Risk Its Survival?
  • By , 5/25/17
  • tags: CHK COP APC EOG
  • Having pleased the market with its solid performance in the March quarter,  Chesapeake Energy   (NYSE:CHK) is in for a tough time ahead. While the US-based independent oil and gas company has made a remarkable progress in improving its deteriorating cash flow position and highly skewed balance sheet since last year, its latest annual shareholder meeting has left the investors disappointed and doubting its speedy recovery. At last week’s meeting, the management hinted at a slower improvement in its financial health, when it shifted the target of attaining cash flow neutrality in 2018 to 2020. In addition to this, earlier this year, Chesapeake had increased the lower range of its capital expenditure guidance, and maintained an aggressive production growth plan. In an environment where there is still uncertainty regarding the reversal of commodity prices, these targets are likely to prove to be detrimental rather than augment the company’s comeback. In this note, we briefly discuss each of these moves and their possible implications on the company. See Our Complete Analysis For Chesapeake Energy Here Chesapeake’s New Targets For 2020 Source: Chesapeake’s Annual Shareholder Meeting, May 2017 Refinancing Debt To Delay Maturity  In order to cope with the ongoing commodity downturn, Chesapeake has been working towards improving its highly levered capital structure. Over the last few quarters, the oil and gas producer has reduced its long term debt from $10.3 billion at the end of 2015 to $9.5 billion in the first quarter of 2017, using either the proceeds of its asset sales or by refinancing its debt at attractive rates. Given the success of this strategy, the company recently announced the private placement of $750 million of 8% senior notes due in 2027, which it plans to utilize to pare down its outstanding debt due in the 2020-2022 timeframe. Although the move appears to be in line with its previous strategy, the terms of the proposed swap are far more unattractive than the previous issues. For instance, Chesapeake is replacing its debt due beyond 2020 with senior notes that bear an interest obligation of 8%. Firstly, the deal will only defer the maturity of its obligations, and not reduce the overall debt from the company’s balance sheet. Secondly, it is expected to increase the company’s annual interest expense notably, as cheaper debt is being replaced by expensive debt. This is likely to weigh on the company’s bottom line over the next few years. Finally, the company is redeeming some of its debt at a sizeable premium, implying that it will be able to pay down a lower amount of debt compared to what it will raise through the issue, which will marginally increase its debt. Chesapeake’s Debt Schedule Thus, we figure that even though Chesapeake has managed to extend the maturity of its debt beyond this decade, it will be a strenuous task to retire $2-$3 billion of its debt and achieve its target of 2x Net Debt-to-EBITDA ratio by 2020. This is because the company has to rely on asset sales to repay its debt obligations, and there is a limited amount of assets that it can divest to maintain stable operations. Plus, the company has set a high capital spending plan for 2017 and beyond in order to meet its audacious production growth targets. Given the paucity of funds, the company might have to raise incremental debt to fund its capital requirements, which is likely to make it difficult for the company to achieve its targeted Net Debt-to-EBITDA ratio in the next couple of years. Expansion Of Common Share Base Could Improve Liquidity In the last week’s shareholder meeting, Chesapeake’s Board approved the expansion of its authorized share capital by $2 billion. This implies that the company is looking to dilute its shareholders’ equity with an aim to improve its liquidity. Expansion of the company’s shareholder base will provide the company an easier and much more effective way of correcting its excessively levered capital structure. To put things in perspective, the oil and gas player had a debt-to-capital ratio of around 40% in 2014, when the commodity slowdown began. At present, this ratio has shot up to nearly 115%, largely because of the company’s dwindling shareholders equity. Source: Google Finance; US Energy Information Administration (EIA)
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    Is R&D Spending A Good Predictor Of Pharma Industry Performance?
  • By , 5/25/17
  • tags: BMY JNJ MRK PFE RHHBY
  • Research and development (R&D) efforts are practically the lifeline of big pharmaceutical firms. Big pharma companies often spend billions of dollars on what eventually may not turn even out to be marketable products. Therefore, the pharma business comes with significant risk, which is mitigated by strong pricing power that these firms enjoy during their products’ patent protection period. So what insights can we extract from the level of R&D spending? Can R&D spending be taken as a reasonable predictor of a company’s sales and value? We did a quick analysis on the last 10 years of data for  Johnson & Johnson  (NYSE:JNJ), Pfizer (NYSE:PFE), Merck (NYSE:MRK), Bristol-Myers Squibb (NYSE:BMY) and Roche (NASDAQ:RHHBY). While all of these companies have highly successful R&D programs, the actual amount spent on R&D does not appear to be a reliable predictor of sales, at least in the context of the recent landscape shift in the pharma industry. However, there is reasonable evidence of R&D spending impacting how investors view a company’s value relative to its sales. However, even this evidence does not hold true for all companies under our coverage, which suggests that R&D productivity has become increasingly hard to assess as companies shift their focus from small molecules to biologics.
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    T-Mobile's Latest Assault On Verizon Could Pay Off
  • By , 5/25/17
  • tags: TMOBILE TMUS S T VZ
  • On Wednesday, T-Mobile  (NASDAQ:TMUS) announced a new limited-time promotion targeted at getting Verizon Wireless customers to switch to its network. The third-largest U.S. carrier is offering to pay (up to $1,000) the full balance of device payments and early termination fees for iPhone or Google Pixel users who have been on the Verizon network for over 60 days. While the plan does have some fine print, it remains one of the most attractive promotional offerings we’ve seen by a U.S. wireless carrier in recent quarters. In this note, we look at the potential financial impact of the plan and how it could impact the carrier. We have a $66 price estimate for T-Mobile, which is in line with the current market price. See our complete analysis for   Verizon  |  AT&T | T-Mobile |  Sprint   Costs Could Be In Line With Previous Promotions Carriers typically spend liberally on postpaid phone subscriber acquisition and retention via device and billing subsidies, considering the better loyalty and higher ARPUs that these customers offer. For instance, we estimated that the limited-time iPhone 7 promotion that T-Mobile and other carriers ran last year potentially cost them as much as $450 per connection . The costs on the new plan could be lower, on average. While there might be scenarios of single-line customers with the priciest and most recent iPhone 7 Plus switching ($969 retail),  T-Mobile estimates that Verizon customers, on average, owe roughly $315 on their device. Therefore, the overall cost per subscriber could be roughly in line with previous promotions and the $1,000 upper limit is likely to reached with multi-line connections, for which monthly billings are higher. Capturing More High-Value  Customers  As the promotion is targeted primarily at high-value customers – iPhone and Pixel customers on the Verizon Network are likely to have higher ARPUs compared to the industry average – they could sign up for more expensive T-Mobile plans. Additionally, T-Mobile requires these porting subscribers to sign up for its $15-per-month device protection plan, which is likely to be a high-margin offering. Although the carrier has indicated that customers can cancel this insurance at any time, if they choose to, it should help to partially offset the costs of the promotion. The Branding And Perception Angle While T-Mobile is offering a somewhat similar promotion to AT&T and Sprint customers (these plans will require customers to sign up for one of its device financing schemes), the deal is being primarily pitched to Verizon customers. T-Mobile was historically viewed as one of the weakest wireless networks, due to its spotty coverage in sparsely populated areas, while Verizon is perceived as having the best coverage and service. However, in recent years, T-Mobile has been steadily improving its performance, leveraging its growing low-band spectrum assets and its 4G focused capital expenditures. By targeting the promotion squarely at Verizon customers, T-Mobile is essentially pitching the strength of its rapidly improving network. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Why Are Citigroup's Shares Still Trading At A Discount To Book Value?
  • By , 5/25/17
  • tags: BAC C GS JPM MS USB WFC
  • Nearly a decade after the economic downturn, the share prices of most U.S. banking giants have completely recovered from the sharp declines they witnessed in the aftermath. In fact, the rally in bank shares since the U.S. presidential election results has taken the share prices of many banks to all-time highs. However, Citigroup stands out as the only major U.S. bank yet to trade above its book value since 2008. In sharp contrast, the largest U.S. regional bank (U.S. Bancorp) currently trades at a P/B ratio in excess of 200%, followed by a figure of ~150% for Wells Fargo. Notably, Bank of America’s shares have also been trading around their book value over recent months, despite the bank being burdened the most by legacy mortgage issues as well as the resulting legal fallout. The table below captures the current P/B ratio for the seven largest U.S. banks. The book value shown is as reported by individual banks at the end of Q1 2017. The P/B ratio compares the share price with the bank’s underlying financial condition (captured by the book value per share), and can indicate whether the shares are being priced too cautiously or too aggressively. Marked differences between the price of a company’s shares compared to its book value are often a sign of under- or over-valuation. At times, however, very low P/B ratios may actually be because of problems with the company’s business model, whereas high P/B ratios could be due to optimism about the future potential of a company’s business model. The table above summarizes the change in P/B ratio for these banks over the last five quarters, with the color gradation along a row added to help understand the overall trend for a particular bank. The sharp decline in bank share prices over Q1-Q2 2016 was due to lukewarm global economic conditions which culminated with an unexpected Brexit vote. But the prices have recovered considerably since then in view of a strong economic outlook. The shares of U.S. Bancorp and Wells Fargo have traded at a sizable premium to book value since the economic downturn of 2008 – indicating that investors believe in the business models and growth opportunities for these banks in the long run. Similarly, P/B ratio figures of around 110-130% for JPMorgan, Goldman Sachs and Morgan Stanley point to a favorable investor outlook for these banks. Bank of America reported the lowest P/B value among major U.S. banks over 2010-14, but investor sentiment has improved considerably over recent years, with the bank working through its massive legal backlog while also cleaning up its balance sheet. The Fed’s rate hike schedule helped the bank’s shares cross their book value in February, and they have stayed largely around that level since then. In light of the strong performance of its peers, Citigroup’s P/B ratio looks underwhelming at 80%. Citigroup has done well to dispose of its non-core assets housed under Citi Holdings over the years – with the bank no longer reporting the division separately. So investor concerns about the quality of assets on Citigroup’s books is unlikely to be the reason for the low P/B figure. In our opinion, there are two distinct reasons why Citigroup’s shares haven’t yet reached their book value: Citigroup’s geographically diversified business model is likely to gain less from the Fed’s ongoing rate hike process than its more U.S.-focused peers. Additionally, the geographical diversification results in an additional layer of risk to Citigroup’s total value, and the strengthening U.S. dollar also presents headwinds to Citigroup’s results. Despite Citigroup’s decision to hike quarterly dividends from 5 cents a share to 16 cents a share over Q3 2016 – Q2 2017, Citigroup’s dividend yield is the lowest among these banks. Citigroup’s poor track record at the Fed’s annual stress test would likely result in a conservative capital return plan for the period 2017-18 as well – something that weighs on the stock’s valuation. We represent dividend payouts and share repurchases in our analysis of Citigroup in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how an increase in Citigroup’s adjusted payout ratio affects its share value by making changes here. See Trefis analysis for  U.S. Bancorp  |  Wells Fargo  |  Goldman Sachs |  JPMorgan |  Morgan Stanley |  Bank of America | Citigroup View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    HPQ Earnings: Growth In Printers And PC Shipment Boosts Revenue
  • By , 5/25/17
  • tags: HPQ
  • Hewlett Packard  Inc. (NYSE:HPQ) announced its fiscal Q2 results on Wednesday, May 24.  The results were better than expected, buoyed by both the Personal Systems and Printing divisions, which reported growth in revenues and improvement in both market share and product mix. For the quarter, the company’s revenues grew by 7% to $12.4 billion. The company also reported Non-GAAP diluted net earnings per share of $0.40, which was at the higher end of its guidance range. Below we provide an overview of the key takeaways from the company’s earnings release. For precise figures, please refer to  our full analysis for Hewlett Packard Incorporated Printer Hardware And Supplies Revenues Report Growth   The printer division is HPQ’s largest vertical and makes up 54% of its value, per our estimates. During the quarter, the printer segment reported a 2% year-over-year increase in revenues to $4.7 billion. While hardware revenue grew by 3% as hardware unit sales increased by 4%, supplies revenues grew by 2% year-on-year. Supplies revenue also saw growth, as revenues grew by 2% year over year to $3.16 billion. Going forward, we expect this division to report revenue growth as it closes its acquisition of Samsung Printers and its 3D printer business continues to gain momentum. The Personal Systems Division Reports Growth As Market Share Improves The Personal Systems division is HPQ’s second largest division and makes up nearly 46% of its value, according to our estimates. While the shipment numbers for PCs stabilized worldwide, the company reported that its worldwide share improved by 2.3% y-o-y to 21.7% on the back of new launches for the premium consumer PC market, and it regained the #1 spot in the global PC market. HPQ reported 5% growth in total units shipped during the quarter. While consumer revenues grew by 16%, commercial revenues grew by 7% year over year. And while the company continued to report declines in its desktop sales (revenue declined by 1% and shipments by 6%), its laptop revenues and shipments grew by 17% and 12%, respectively. As a result, the segment saw 10% year-over-year growth in revenues to $7.66 billion, while its operating profit grew by 3% to $825 million, benefiting from scale, operating cost savings, and a favorable product mix. Furthermore, PC average selling prices were up both year-over-year and sequentially, driven by favorable pricing and a shift in product mix to the premium segment of the market. Going forward, HPQ is well positioned in the PC market as it continues to launch premium and mid-tier PCs, specifically focusing on secure products such as EliteBook at competitive prices. This should help the company to report revenue growth in the coming quarters. Outlook For Q3 2017 And 2017 For fiscal Q3, HP estimates GAAP diluted net EPS from continuing operations to be in the range of $0.36 to $0.40 and non-GAAP diluted net EPS to be in the range of $0.40 to $0.43. For 2017, HP estimates non-GAAP diluted net EPS to be in the range of $1.59 to $1.66. View Interactive Institutional Research (Powered by Trefis): Global Large Cap  |  U.S. Mid & Small Cap  |  European Large & Mid Cap More Trefis Research  
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    Union Pacific: Smooth Sailing Ahead Amid Favorable Business Conditions
  • By , 5/24/17
  • tags: UNP CSX NSC
  • Union Pacific’s financial results have been characterized by a steady decline in revenue over the past few years, as illustrated by the table shown below. However, the year 2017 is likely to represent a turning point, with revenue set to rise steadily over the next few years. The main reasons for the decline in the company’s top line over the past few years were the declines in coal and metals shipments (which are included in the industrial products category), as illustrated by the charts shown below. Declines in Coal & Metals Shipments in Past Years Union Pacific’s shipments of coal declined by nearly 34% between 2014 and 2016, as a result of a decline in demand from utilities. Benchmark natural gas prices averaged significantly below $3 per MMBTU over this period, which accelerated the shift towards natural gas as the preferred fuel for electricity generation in the U.S. In addition, President Obama’s Clean Power Plan, which mandated a 32% decline in power plant carbon dioxide emissions below 2005 levels by 2030, created a regulatory environment which favored an increasing adoption of natural gas for electricity generation. All of these factors dampened the demand for coal in the U.S., adversely affecting production as well as rail shipments of the commodity over the period 2014-2016. Besides unfavorable business conditions in the coal industry, the domestic steel industry also had a poor run over the period 2014-2016. Domestic steel producers were adversely impacted by a surge in steel imports, a large proportion of which were sold at unfairly low prices. Competition with these unfairly priced steel imports adversely impacted both steel production as well as steel prices. Shipments in Union Pacific’s Metals & Products sub-category declined by around 33% over the period 2014-2016. Besides the decline in the shipments of the aforementioned commodities, declining oil prices  over the course of the past few years negatively impacted fuel surcharge revenue for Union Pacific. All these factors dragged down the company’s top line over the past few years. A Change in Fortune in 2017 The year 2017 is likely to represent a considerable improvement in business prospects for Union Pacific, characterized by a reversal in the negative trends weighing on the company’s top line over the last few years. Coal shipments have risen sharply this year, as a result of a sharp increase in natural gas prices. As per EIA estimates, benchmark natural gas prices are expected to rise to $3.17 per MMBTU and $3.43 per MMBTU in 2017 and 2018, respectively. Rising U.S. natural gas and LNG exports as well as higher demand for natural gas from utilities amid accelerating economic growth are some of the reasons for the increase in prices of the fuel. In addition, the implementation of the Clean Power Plan was stayed by the Supreme Court amid legal challenges by a number of coal producing states. Moreover, the Trump administration has promised to roll back restrictive environmental regulations in order to boost U.S. coal production. While higher gas prices have already boosted U.S. rail shipments of coal, if the federal government successfully enacts favorable regulation, coal shipments could rise further in the coming years. Besides the U.S. coal industry, domestic steel companies have also witnessed a considerable improvement in fortunes in recent quarters. Based on petitions by domestic steelmakers, the Department of Commerce imposed punitive tariffs on unfairly traded steel imports from a number of countries such as China and South Korea. The imposition of these duties weakened the competition from steel imports to the domestic steel industry, translating into higher production and rail shipments of steel. Moreover, the federal government has outlined plans for a ten-year $1 trillion revamp of domestic infrastructure. If implemented, the infrastructure plan will substantially boost the demand for, and the rail shipments of, steel and other industrial metals. While recovering shipment volumes are expected to boost the company’s top line, higher oil prices could offer further support. A recovery in oil prices in 2017, driven by OPEC production cuts, is likely to translate into higher fuel surcharge revenue, further supporting revenue growth. Union Pacific’s business prospects are certainly looking up at the moment, with shipments and revenue set to rise in the coming years, in stark contrast to the past few years characterized by a declining top line. At the same time, Union Pacific’s ongoing productivity improvement initiatives have helped the company rationalize its work force and locomotive fleet. The company is targeting an operating ratio (operating expenses as % of revenue) of 60% by 2019, as compared to 63.5% in 2016. Thus, the company’s fortunes certainly seem to have turned a corner in 2017, with a promising future lying ahead. Have more questions about Union Pacific? See the links below. Union Pacific’s Q1 2017 Earnings Review: Top Line Growth, Productivity Gains Drove Earnings Improvement What’s Driving U.S. Rail Shipments This Year? Notes: See More at Trefis | View Interactive Institutional Research (Powered by Trefis) Get Trefis Technology
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    Bank of America Still Lags U.S. Banking Peers In Terms Of Core Capital Ratio
  • By , 5/24/17
  • tags: BAC C GS JPM MS WFC
  • A jump in investment banking profits for the first quarter of the year had a positive impact on capital ratio figures for the largest U.S. banks – helping them increase their capital buffers to well above the fully phased-in levels they need to achieve by 2019. By the end of Q1 2017, Morgan Stanley strengthened its position as the best capitalized major bank in the world with a common equity tier 1 (CET1) figure of 16.6% – a good 660 basis points (6.6% points) above its 2019 target. In comparison, Bank of America’s CET1 buffer is a modest 100 basis points (1% point). That said, it must be remembered that the transitional CET1 figures for these banks are several percentage points higher than the fully phased-in figures shown in the table below, and all U.S. banking giants comfortably meet their current capital ratio requirements. The figures at the end of Q1 2017 and the 2019 fully phased-in target compiled here are as reported by each of these banks in their latest 10-Q SEC filings. The CET1 ratio is a key quantitative measure used by the Fed to approve or reject a bank’s capital plans each year as a part of its Comprehensive Capital Analysis and Review (CCAR) – commonly known as the bank stress tests. A larger difference between the current and target CET1 ratios gives a bank more leeway in handing out cash to investors in the form of share repurchases and dividend hikes. With the Fed slated to release the results of the current cycle of its annual stress tests next month, the sizable capital buffers created by all banks should help most, if not all, of them announce an increase in their capital return plans. We represent dividend payouts and share repurchases in our analysis of Bank of America in the form of an adjusted dividend payout rate, as shown in the chart below. You can understand how an increase in Bank of America’s adjusted payout ratio affects its share value by making changes here. Notes: 1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment/ ask questions on the comment section 2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to the full Trefis analysis for  Wells Fargo  |  Goldman Sachs |  JPMorgan |  Morgan Stanley |  Bank of America | Citigroup View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Here’s How Coca-Cola Is Being Affected By The e-Commerce Trend
  • By , 5/24/17
  • tags: KO PEP
  • In a recent interview to Bloomberg, The Coca-Cola Company ‘s (NYSE:KO) Chief Executive Officer (CEO) mentioned that the slowdown in mall traffic is affecting the company’s sales. Retail stores, supermarkets, and vending machines at mall food courts are important distribution channels for Coca-Cola and as consumers move away from shopping at brick and mortar stores, preferring the convenience of online shopping, these channels are being impacted adversely. Further, as an increasing number of consumers order groceries online, picking up a bottle of Coca-Cola is often “forgotten.”  The company is already struggling to grow sales as consumers shift preferences towards healthier beverages. The lack of traffic in obvious locations where consumers might pick up a can of soda without much thought is impacting the company’s sales further. Adapting To The Digital Disruption One of the key priorities of James Quincey, Coca-Cola’s new CEO, is to adapt to the changing retail landscape and use technology in its favor. The company recently started using Google technologies in U.S. grocery stores to deliver personalized advertisements on customers’ smartphones. The beverage giant is also looking to reduce the number of vending machines installed at various locations, as traffic in these areas declines. However, the key for revenue growth would be to find newer distribution channels in line with the changing landscape. This might involve introduction of new packages which are easier to deliver, as customers look for online shopping and home delivery. In India, the company runs a website Coke2Home which delivers its products to 15 locations across the country.  Coca-Cola has also created a new function called Franchise Capability & Business Transformation which is aimed towards improving the supply chain technology and processes at the franchise bottlers to make them ready for digital selling. While a digital selling platform can help Coca-Cola grow its sales, management of logistics to deliver its products might not be a straightforward task. The company is also using social media platforms actively for promotion of its products. Coca-Cola can potentially explore these platforms for selling its products which are increasingly becoming the “virtual hangout” destination for the younger population. The preference of millennials towards healthier beverages and the convenience of e-commerce have impacted Coca-Cola negatively. The company needs to adapt itself towards the changing retail landscape, and to innovate in terms of both product and distribution channels to drive sales in the long term. View Interactive Institutional Research (Powered by Trefis): Global Large Cap |  U.S. Mid & Small Cap |  European Large & Mid Cap More Trefis Research
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    Is Nike On Track To Hit $50 Billion In Sales By 2020?
  • By , 5/24/17
  • tags: NKE
  • Nike  (NYSE:NKE) is a company that requires no introduction. The brand has established itself as a household name synonymous with great sports apparel and footwear, complete with a celebrated following the world over. That said, in the recent past, the company has been struggling with increased competition from a resurgent Adidas, while facing pressure from Under Armour in its basketball division in North America. This has adversely affected Nike’s revenue growth over the last few quarters. Additionally, future orders, a key metric that indicates demand, continues to remain low, in comparison to earlier quarters. Previously in 2015, the global sport apparel leader boldly announced its plans to cross $50 billion in sales by 2020. That is to say that the company hopes to increase its sales by about $20 billion in a span of five years. To put things into perspective, Nike took a prolonged 13 years to add $20 billion in revenues last time around, to jump from a $10 billion business to a $3o billion one in 2015. So from the get-go, this target seems a little ambitious. The company revealed that it hopes to grow the overall business by concentrating its resources in three main areas: e-commerce, women, and its Jordan brand. E-commerce E-commerce accounts for a large part of Nike’s growth strategy. The company expects to achieve about $7 billion in sales from this channel by 2020. In 2015, the company recorded $1.2 billion in digital sales. Therefore, in order to achieve its target, Nike must achieve a compounded annual growth of at least 42%. As high as this may seem, the sportswear manufacturer was ahead of course on this one up until the previous year. All through fiscal 2016, the company managed to beat the required growth by a significant margin. However, this impressive growth was largely because Nike began offering its e-commerce capabilities in newer regions. Since the announcement in 2015, the company added e-commerce offerings in Canada, Switzerland, Norway, Chile, Turkey, and Mexico. That said, growth in e-commerce has since witnessed a significant dip. In the most recent quarter, the company managed to increase digital commerce sales by an insufficient 18%. For the 9 months of FY 2017 thus far, the company has managed to grow its sales in the channel by a low 35%, which is significantly below the required growth rate. What’s more, the e-commerce sales growth has been declining with each quarter in the year so far, which makes achieving the target that much more difficult. Women’s Nike, like all other major sportswear manufacturers, has increased its focus on providing better apparel to women. Given that women make up about half of the world’s population, it’s about time. Up until now, athletic apparel companies would simply take men’s clothes and offer them in more colorful, smaller sizes. This strategy has proved notably ineffective. The failure of this strategy became even more obvious when Lululemon started up, catering to the specific needs of women’s athletic apparel. It, hence, comes as no surprise that Nike has placed growth at the women’s segment high on its priority list for the five year period leading up to 2020. At present, Nike’s Women’s category consists of about 29% of the total Men and Women’s sales. The company hopes to build the business to $11 billion by 2020, from $5.7 billion in 2015. In this respect, Nike is working hard to change its image. The company now creates apparel specifically for women, and even operates a few “women’s only” Nike stores. It has even created several ad campaigns to support its shift in ideologies. The 3 minute Nike video, released last year, focusing on Indian female athletes is testament to this fact. Additionally, it has been noted that women are especially drawn to tracking their workouts in fitness apps. In this respect, Nike has worked hard to make the app more user-friendly to its female audience. By connecting women to the brand digitally, the company hopes to increase their loyalty to the brand, thereby increasing sales. Furthermore, women are also actively embracing the athleisure trend, which has witnessed great growth in the last few quarters.What’s more, Nike’s women’s business has been outpacing its men’s business, and has grown in the double-digit territory for many quarters. That said, Nike is expected to face stiff competition from Under Armour and Lululemon in this category. The incredibly low overall penetration of this segment will allow all companies to grow, albeit at a slower pace than expected. Jordan Just like the Women’s segment, the company expects to double its sales at Jordan, bringing in about $4.5 billion in revenues by 2020. Even though, Michael Jordan stopped playing basketball close to 15 years ago, the apparel and shoes developed for him continue to sell out like hot cakes. This is mostly because Jordan actively promotes his brand still. As per the agreement, the basketball legend receives a portion of all Jordan revenues. Apart from this, fans have created a cult following around the star, which also contributes massively to the image, and hence, sales. That said, Nike has dealt with intense competition in the footwear market, primarily from Adidas and Under Armour, in the last few quarters. In the basketball segment specifically, Under Armour has emerged as a major competitor driven by Stephen Curry’s popularity. The Curry series of basketball shoes has been selling much better in the last few quarters than Nike’s Jordan or LeBron series. This forced the company to release cheaper variants of its KD and LeBron shoes in an effort to regain some of the lost market share, even though this move dented margins. Additionally, Nike has not been able to create the right amount of buzz surrounding the Jordan brand in international markets. To really achieve that target, the company must focus on increasing sales abroad, seeing as market share in the domestic market continues to lose out to competition. So all in all, it seems highly implausible that Nike will be able to reach its revenue target, even though it might come close. Given the heavy competition and the sluggish digital sales, Nike could take a while to cross the $50 billion mark. View Interactive Institutional Research (Powered by Trefis): Global Large Cap  |  U.S. Mid & Small Cap  |  European Large & Mid Cap More Trefis Research