Category: Global stocks

Global Stock refer to share that are traded on multiple exchanges with different currencies. For example, if a publicly-traded company issues shares in dollars on the New York Stock Exchange and in pounds on the London Stock Exchange, it is issuing global registered shares. Global stock to a portfolio offers diversification and may provide higher returns. Global stock markets may experience higher levels of volatility than other domestic markets with bigger swings to both the upside and downside.

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Global stocks

Strong Cycling Demand Amid Pandemic Drives Record Sales for Shimano in First Quarter of 2021

Shimano has capitalized from a significant rise in demand for bicycles since the second half of last year, as its bicycle component business (which makes up about 80% of revenue) boasts the leading global share of medium/high-end gears. The rise in demand is attributed to more people partaking in cycling as a mode of transportation and as an outdoor activity that allows people to avoid close-contact in crowded spaces amid the pandemic. We expect sales to remain at similar, high levels for the second quarter, as retailers in Europe and North America (Shimano’s largest markets) as well as bicycle frame manufacturers look to restock their inventory to keep up with demand.

We currently assume record sales with a 17% year-on-year growth in fiscal 2021, but we continue to pay attention to: 1) any potential signs of whether some of the momentum starts to slow down in the second half compared with recent peak levels, as increased vaccinations might lead to other interests than activities that promote social distancing; and 2) further improvement in supply chain-related issues to keep up with high demand levels. The company has been able to improve capacity utilization to better meet increasing demand, compared with last year, by eliminating many of the bottlenecks related to production. Further, with construction of a new factory in Singapore, we expect this will increase total production capacity by about 10% next year. While fixed costs related to the construction will likely impact margins in the near term, we still think Shimano will realize operating margin expansion in 2021, to an all-time high of 23% from 21.9% in 2020.

Shimano also witnessed a record top-line growth rate of 64% year on year, in the first quarter. Aside from strong retail sales of bicycles and related products in Europe and North America in the first quarter of this year, the comparable period a year ago was weak due to demand initially plummeting as lockdown measures meant many people stayed at home. Fishing tackle sales, which essentially makes up about the remaining 20% of companywide sales, also increased by 26% year on year in the first quarter from a warm winter in Japan as well as strong demand across its key overseas markets. As a result of increasing divisional sales across all business segments and improved capacity utilization, operating margin for the quarter also reached its quarterly peak at 25.8%, up from 16.5% in the same quarter previous year.

We note orders for its new high-end EP8 sport e-bike components series were favorable this quarter, implying an improvement from the previous year in fiscal 2020 when capacity constraints led to year-on-year declines in product sales. Further, and more importantly, this reaffirms our view that the company is able to adapt to evolving trends to remain competitive in newer areas within the cycling industry. According to management, e-bike components currently make up about 10% of Shimano’s total bicycle segment’s divisional sales and is expecting related sales to increase to record levels at about 40% higher than in 2019. As demand for its new high-end products, like the EP8 as well as the Deore MTB components, continue to grow, we expect favorable product mix will also contribute to improved margins in 2021.

Shimano Inc Company Profile

Shimano develops, manufactures, and distributes bicycle components, fishing tackle, and rowing equipment. The company also develops and distributes lifestyle gear products, such as apparel items, shoes, bags, and related items. Approximately 80% of companywide operating income comes from its bicycle components segment. It has operations in Japan, Asia, Europe, North America, Latin America, and Oceania. The company was founded in 1921 and its headquartered are in Osaka, Japan.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Lowering Harmonic Drive’s FVE but Still See Upside Potential; Wide Moat Remains Intact

We note that our revised expectation of margin expansion is still higher than management’s plan and we currently see upside potential in the low- to mid-teens percent. Throughout calendar 2020, the company’s share price grew significantly as a result of high growth expectations for HDS’ strain wave reduction gears, which serve as vital components for high precision machinery like industrial robots and semiconductor equipment. However, since reaching its peak of around JPY 9,200 at the end of 2020, HDS’ share price has fallen year to date, as the market’s excessively high growth expectations have been corrected.

The medium-term plan, ending in fiscal 2023, implies that operating margin will return to normalized levels in fiscal 2023–at 21.4%, from 2.3% in 2020. We believe the plan is conservative, but we also take this into account for our downward revision to our projection. Further, we consider the potential impact of pricing, as management commented that a domestic industrial robot manufacturer (HDS’ customer) hopes to eventually adopt a “two company” supplier policy for small-size reduction gears. At the moment, compared with other manufacturers’ gears, there is a significant pricing premium on HDS’ strain wave reduction gears due to hurdles by other companies in replicating the quality of HDS’ high-end gears. We note that this impact would not be immediate and that despite the likelihood of reduced pricing over the medium/long term, HDS’ wide moat remains intact, as the high-end strain wave gear market is not a “winner take all” market and will likely continue to have high barriers to entry.

Over the medium term, we assume margins will increase from 22% to 25.5% between fiscal 2022 and 2025, compared to 25% to 28% in our previous projection during the same year. Further, we maintain our fiscal 2021 operating margin of 18%, which is also higher than management guidance of 12.7% margin for the same year. We think this is possible, based on higher sales assumptions compared to guidance and after considering its high contribution margin of about 50%. We note that our assumption still implies operating margin of 5 percentage points lower compared to fiscal 2017 levels despite similar companywide revenue levels. We attribute this margin gap between 2017 and our 2021 projection to: 1) higher production-related costs, including increased expenses related to the operations of its new factories in Japan and North America as well as record D&A levels as a result of peak capital investments in 2018 and 2019; 2) increased R&D spending as part of its medium-term plan; and 3) near term rise in costs related to packaging and shipping.

For the current fiscal year, we assume 47% top-line year-on-year growth, which is higher than both guidance and our previous projection (40% and 37% year-on-year growth, respectively), as we expect stronger top-line recovery in Japan/Asia and Europe segments. We attribute this to order improvement in the fourth quarter, which exceeded our previous expectations, and likelihood of further increases in orders/sales throughout the fiscal year from industrial robot and collaborative robot, or cobot, manufacturers in these regions, as factory automation investments in the automobile industry pick up. Fourth-quarter consolidated orders in the Japan/Asia segment more than doubled year on year, and order growth in the Europe segment also turned positive in the fourth quarter with 12% year-on-year growth, after two consecutive declines from same periods of the previous year. We expect these factors will also contribute to margin expansion going forward.

The company’s fiscal 2020 year-end results, ending in March, were in line with our expectations, as companywide revenue remained flat year on year, while operating margin remained low at 2.3%–though this is an improvement from minus 0.5% in 2019. Margins have been impacted by high fixed costs from its newly constructed factories in Japan and North America, where HDS spent in excess of JPY 30 billion or 30% of sales collectively in 2018 and 2019. While the parent entity’s standalone operating margin improved by about 8 percentage points to 10.6%, from strong sales to Japanese industrial robot makers, other key group companies in North America and Europe realized declining operating income from lower sales for mainly non-industrial robot applications (such as for medical, amusement, and service robot industries).

Harmonic Drive Systems Inc Company Profile

Harmonic Drive Systems Inc., or HDS, manufactures and sells precision control equipment and components worldwide. It offers high-precision reduction gears (speed reducers) under the Harmonic Drive brand as well as other mechatronics products such as rotary actuators, linear actuators, and AC servo motors. The company also provides planetary-gear speed reducers under the Accu Drive and Harmonic Planetary brands. Its products are used in industrial robots, semiconductor manufacturing equipment, and other high precision equipment. HDS was founded in 1970 and is headquartered in Tokyo, Japan.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Ramsay Health Care Ltd

Ramsay’s offer of GBP 2.40 per Spire share represents an enterprise value of GBP 2 billion or EV/EBITDA multiple of 10.9 on pre coronavirus fiscal 2019 earnings. Post-acquisition, our EPS for fiscal years 2023 to 2025 increases by an average of 11%, slightly ahead of the high-single-digit EPS accretion management guided for fiscal 2024. However, we still view the transaction price as fair, with shares still screening as overvalued.

We expect Spire’s revenue to grow at a low-single-digit percent and operating margin to largely be maintained at 10%. In addition, we factor in GBP 26 million in annualised cost synergies from fiscal 2024 through procurement benefits, capacity utilisation and a reduction in administrative costs. The scheme is first subject to a Spire shareholder vote expected in July 2021, followed by a likely 12-month review process by the U.K. Competition Market Authority, or CMA. Ramsay’s 8% market share combined with Spire’s 17% would create the largest independent hospital operator in the U.K., but at most we anticipate CMA may require Ramsay to divest certain hospitals or clinics. Accordingly, we forecast full integration and control in fiscal 2023 and full realization of synergies in fiscal 2024.

We view the acquisition as strategically sound, in addition to extending Ramsay’s geographic reach. Spire provides more exposure to private revenue streams and higher acuity inpatient admissions. This complements and balances Ramsay’s U.K. case mix, which is dominated by day patients and revenue sourced from the National Health Service. We anticipate Ramsay to fund the deal through existing debt facilities and still afford a 50% dividend payout ratio. However, Ramsay indicated potential capital management initiatives or asset sales to deleverage its balance sheet if needed.

Profile.

Ramsay Health Care is the fifth-largest global private hospital operator with approximately 480 locations in 11 countries. The key markets in which it operates are Australia, France, the U.K., Sweden and Norway. It is the largest private hospital group in each of these markets other than Norway where it is number two and the U.K. where it ranks fourth. Ramsay Health Care has a history of acquisitive growth, with the most recent acquisition being that of Stockholm-listed Capio AB in November 2018. 51%-owned Ramsay General de Sante is listed on Euro next Paris. Ramsay Health Care undertakes both private and publicly funded healthcare.

Source:Morningstar

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Xiaomi Produces Record Smartphone Sales and Gross Margins; FVE Raised to HKD 20.70

The smartphone gross margin of 12.9% was up 480 basis points on the previous corresponding period. Up until third-quarter 2020 Xiaomi’s smartphone gross margins averaged 7.5% and never rose above 9% in any quarter. Fourth quarter last year these margins increased to 10.5% and then jumped to 12.9% in the first quarter. The smartphone performance drove consolidated operating profit (less investment gains) up 161% with an 8% consolidated operating margin, much better than its previous best quarterly operating margin of 6.1% in second-quarter 2019. Huawei’s retreat seems to have lifted margins across the industry with Samsung’s smartphone business and Apple’s consolidated business also reporting their best operating profit margins since 2016. We lift our fair value estimate to HKD 20.70 from HKD 16.30 previously due mainly to increased gross margin forecasts in the smartphone business as well as increased smartphone revenue growth forecasts in 2021, with the lift in the value of Xiaomi’s investment portfolio over the quarter and a slightly stronger CNY also helping. Our no-moat rating is retained as we believe Xiaomi is predominantly an electronics hardware supplier with limited switching costs with its internet services business not yet well enough developed to assign a moat to. On our estimates Xiaomi currently trades on a 2021 price/earnings ratio of 31 times. Despite Xiaomi’s growing Internet of Things and lifestyle services business revenue giving it some differentiation from other consumer electronics peers, we believe this multiple is still above what could be reasonably justified.

Xiaomi’s smartphone segment had another strong quarter with Xiaomi’s total number of smartphones sold globally rising by 69% and smartphone revenue increasing by 70% from the previous year. Smartphone gross profit was up 170% with gross profit margin increasing to 12.9% from 8.1% in first-quarter 2020. Until the third quarter of 2020, the average smartphone gross margin for the previous 15 quarters had been 7.5% with a range of 3.3% to 9%. The margin then jumped to 10.5% in fourth-quarter 2020 and 12.9% in first-quarter 2021. Given Xiaomi generates around two thirds of its revenue from smartphone, its valuation is very sensitive to the smartphone gross margin assumption. If we double the smartphone gross margin assumption from 7.5% to (say) 15%, holding all other assumptions equal, Xiaomi’s valuation nearly doubles. Xiaomi pointed toward the shift in product mix toward higher end smartphones and reduced marketing and promotion spend given tightness in the semiconductor supply chain as the key drivers for the margin increase.

We estimate that reduced competitive intensity from Huawei has probably also helped smartphone industry margins and there may also be some premium attached to 5G phones. In the first-quarter 2021, key competitor, Samsung, reported its highest quarterly smartphone operating margin since the second quarter of 2016. The first quarter also saw Apple reporting its highest quarterly company operating margin since first quarter of 2016.

Xiaomi admitted that gross margin expansion had not been its main focus nor does it expect it to be in the near future as it is quite rightly focused on increasing market share, particularly in the mid-high end phone segment. It expects future growth to come from increased penetration into the offline segment in China as it is currently expanding its store footprint with a target of around 10,000 stores by the end of 2021. We forecast Xiaomi to grow its smartphone revenue by 44% in 2021 and at an average of 18% per year thereafter out to 2025 and assume its smartphone gross profit margin increases from 11.0% in 2021 to 11.4% in 2025 having lifted these assumptions by around 200 basis points following this result.

Revenue from the Internet of Things and lifestyle products segment increased by 41% year over year in the first quarter after growing by 8.6% in 2020. We note that the prior period was negatively impacted by COVID-19. Gross margin increased to 14.5%, which was also a quarterly record. Management had previously indicated that it had proactively reduced the number of stocks keeping units in this division to focus more on those products that interworked with the smartphone ecosystem. The company indicated that global shipments of its smart TVs were down 4% to 2.6 million for the first quarter. Larger television competitor, TCL, reported global TV sales volumes up 33% for the first quarter with TV sales in China up 8.3% and non-China sales up 43%. We forecast that Xiaomi can grow its Internet of Things and lifestyle products revenue by an average of 15.1% per year out to 2025 with gross margins averaging 12.0%.

Revenue from internet services was below expectations, increasing by 11.4% year over year in the first quarter after growing at 20% in 2020. Monthly active users, or MAUs, of its Mi User Interface increased to 425 million at the end of March from 396 million at the end of December 2020 and were up 29% year on year. However, average revenue per user was down 13% to CNY 5.3 per month. Advertising revenue was strong growing by 20% to CNY 3.6 billion and making up 58% of total internet services revenue. This is mainly driven by smartphone sales with the improved mix of higher end smartphones helping Xiaomi to grow the preinstalled app revenue. The high percentage of advertising revenue and improved margins from the fintech business drove internet services gross margin to 68.4% for the quarter. We believe the dominance of advertising in this revenue stream speaks to the difficulties Xiaomi has faced in building non-hardware-related internet revenue streams. We forecast internet services revenue growth of 20% per year to 2025 noting that growth in first-quarter 2021, internet services revenue was slower because of the very high gaming revenue in first-quarter 2020 due to the pandemic.

Source: Morningstar

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Pendal Group – Investment outlook

We forecast FUM to grow 10% per year to about AUD 146 billion by fiscal 2025–exceeding management’s “50% growth by fiscal 2025” target–mainly driven by market returns of 7.5% per year. A key highlight was the persistence of Pendal’s improved performance since the COVID-19 selloff, which should help attract stronger inflows over the near term. With 71% of FUM in funds that have outperformed their benchmarks over a 3-year period (above the 3-year average of 66%), 52% of funds are now in the first and second quartiles (over a 1-year period).

Performance will be the primary driver of fund flows. While we also expect new money into Pendal’s new offerings– such as its Regnan ESG products–we don’t expect them to add meaningfully to FUM in the near term. Amid the proliferation of ESG funds and ETFs, we question if these new products will materially add to flow in the foreseeable future. Magellan’s Global Sustainable strategy has amassed just AUD 151 million in FUM after four years, while Trillium, Perpetual’s ESG manager, has circa AUD 6 billion in FUM after operating for 38 years.

Pendal could suffer further outflows, notably from the U.K./ European equities and Westpac mandates, but we see risk declining. We understand clients who withdrew their funds due to Brexit uncertainties tended to be non-U.K clients, and they currently make up less than 20% of Pendal’s U.K./ European equity mandates.

Elsewhere, the guided 8%-10% growth in fiscal 2021 fixed costs and a one-off spend of AUD 15-18 million from fiscal 2021-24 are largely strategic (focused on new products, marketing and technology), and in our view, are necessary to help Pendal grow FUM and revenue amid an increasingly competitive investment landscape. We assume Pendal will spend at the higher end of guidance, and forecast the costto- income ratio to average 64%–above the 3-year average of 60%–over the next three years and trend downwards thereafter.

Management has revised its dividend payout policy to 80%-95% of underlying profit after tax (which will replace cash NPAT as an underlying profit measure) starting fiscal 2021. We think this is a reasonable range, underpinned by the group’s low capital requirements, strong free cash flow and pristine balance sheet with no debt. We currently assume a payout ratio of 88%, which equates to a midcycle dividend yield of 6.5%.

 (Source: Morningstar)

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Perpetual Ltd– Perpetual to Go Full Steam

While it benefits from Australia’s ageing demographics and the compulsory superannuation contribution levy, its core Australian equity funds are suffering from net outflows, owing to structural issues of industry superfunds managing more Australian equities in-house and investors increasing allocation to cheaper passive investments and global assets as well as poor short-term performance. Recent acquisitions of Barrow Hanley and Trillium improve the earnings outlook in its funds management business, and it should benefit from continued growth in its private and trust segments and improving markets.

Key Investment Consideration

  • Its core investment segment is facing the structural issues of increasing allocations to passive investment styles and global assets, as well as industry superfunds managing more Australian equities in-house.
  • Its earnings are highly sensitive to equity market and macroeconomic conditions such as credit growth, and investor confidence, making it a high-beta stock.
  • Its funds under management and advice provide it with a recurring revenue stream and generate high returns on invested capital and strong free cash flows. It should also benefit from increases in the compulsory superannuation contribution.
  • Perpetual’s large scale of funds under management and advice provide it with recurring revenue streams and allow it to generate high returns on invested capital. Combined with relatively low maintenance capital requirements, it generates strong free cash flows allowing it to maintain a high dividend payout ratio.
  • Perpetual’s private segment is well positioned to take advantage of its heritage brand, as well as Australia’s aging demographic and growth in the high-net-wealth financial advisory sector. It also benefits from less regulatory scrutiny than advisors like the major Australian banks, AMP, and IOOF, which focus more
  • on the mass affluent.
  • Perpetual should benefit from the continuing growth in retirement FUM from the phased-in increase of the compulsory superannuation contribution levy from 9.5% to 12%.
  • Perpetual’s core investments segment is facing the structural issues of investors increasing allocations to passive investment styles and global assets, as well as industry superfunds managing more equities inhouse.
  • Its earnings are highly sensitive to equity market and macroeconomic conditions such as GDP and business and investor confidence, making it a high-beta stock.
  • Perpetual is not well positioned to take advantage of the likely increase in allocation of Australian investors
  • to passive investments.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Best Buy Co Inc

Revenue was $11.6 billion, up from $8.6 billion in 2021’s first quarter and ahead of our $10.4 billion forecast. Comparable sales were up 37.2%, bolstered by the domestic appliance segment (comps up 67%), which the firm attributed to economic stimulus and sustained spending on the home. Best Buy’s 6.6% operating margin was ahead of the 2.7% result in fiscal 2021 and our 3% projection and reflected an improvement over 2020’s first-quarter result of 3.7%. Fiscal 2022 first-quarter EPS came in at $2.32, well above our $0.90 estimate. For comparison, first-quarter 2020 EPS was $0.98.

While these results were impressive, we are skeptical about their sustainability as economic stimulus payments are set to end and other disposable income options are increasing. Management’s second-quarter guidance indicates a deceleration of comps (17%) and a flat gross margin compared with 2021 (22.9%). For the full year, we expect comps around 5% (in line with updated guidance of 3%-6%), flat year-over-year gross margins, and a slight increase in selling, general, and administrative expense. We don’t plan a material change to our $101 fair value estimate and view the shares as overvalued, given the headwinds Best Buy faces.

One notable takeaway in Best Buy’s favor was the efficacy of its e-commerce and omni channel strategy despite the reopening of physical stores. Sixty percent of online orders were fulfilled from a Best Buy store via shipping, delivery, or pickup in store. Additionally, online orders made up 33% of domestic sales, compared with 15% in 2020. The firm is planning to capitalize on this with its new Best Buy Beta loyalty program, which offers perks including same-day delivery and special member pricing. For Best Buy to remain competitive after COVID-19, an evolving e-commerce plan is imperative.

Profile

Best Buy is one of the largest consumer electronics retailers in the U.S., with product and service sales representing more than 9% of the $450 billion-plus in personal consumer electronics and appliances expenditures in 2019 (based on estimates from the U.S. Bureau of Economic Analysis). The company is focused on accelerating online sales growth, improving its multichannel customer experience, developing new in-store and in-home service offerings, optimizing its U.S., Canada, and Mexico retail store square footage, lowering cost of goods sold expenses through supply-chain efficiencies, and reducing selling, general, and administrative costs.

Source:Morningstar

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Airbus SE

It benefits immensely from being in a duopoly with Boeing in the commercial aircraft manufacturing business for aircraft 130 seats and up; the pair of companies act as a funnel through which all commercial aircraft demand must flow. This allows both companies to actively manage their order backlogs to reduce cyclicality, despite the intense cyclicality of the customer base.

Airbus’ commercial aircraft segment can broadly be split into two parts: nimble narrow-bodied planes that are ideal for efficiently running high-frequency short-haul routes, and wide-bodied behemoths that are generally reserved for transcontinental flights. Recently, narrow-body volume has increased substantially due to the rise globally of low-cost carriers and improved technology that allows smaller airplanes to operate flight paths that were previously unprofitable. We think that Airbus’ A320 family has taken the advantage in the upper end of this market, with the introduction of the A321neo LR and the forthcoming A321neo XLR, which will have a capacity of 4,700 nautical miles and would enable single-aisle routes from India to Europe. We anticipate that further technology improvements will push low-cost carriers into routes that have been dominated by legacy carriers.

On the wide-body side of the market, we anticipate much slower growth, as we expect improving technology will allow airlines to substitute narrow bodies for wide bodies for an increasing number of routes. Airbus has a competitive wide-body offering, the A350, though backlogs suggest that Boeing’s comparable 777, 777X, and 787 offerings resonate more with customers. Airbus also has segments dedicated to the production of defense-specific products and helicopter manufacturing. These businesses are less material to Airbus as a whole, generating slightly over 10% of our midcycle EBIT. We anticipate modest growth from these segments, largely assuming that defense spending as a proportion of GDP remains constant in the European Union and that helicopter deliveries rebound over the medium term.

Bulls say

  • Airbus’ A320 family continues to have a substantial lead in the valuable narrow-body market, and the A321neo XLR has the potential to open new long range routes to low-cost carriers.
  • Airbus is well positioned to benefit from emerging market growth in revenue passenger kilometers and a robust developed-market replacement cycle.
  • We expect that commercial airframe manufacturing for aircraft 130 seats and up will remain a duopoly over the foreseeable future. We think customers will not have many options other than continuing to rely on incumbents.

Bears Say

  • Aerospace remains a highly regulated space, and regulatory burden could increase globally subsequent to the grounding of the Boeing 737 MAX.
  • It could take years for airlines to recover from the economic carnage caused by COVID-19, and the virus could lead to changed consumer behavior that would be unfavorable for the industry (for example, video conferences replace business trips).
  • Aircraft development is susceptible to development delays and cost overruns.

Profile

Airbus is a major aerospace and defense firm. The company designs, develops, and manufactures commercial and military aircraft, as well as space launch vehicles and satellites. The company operates its business through three divisions: commercial, defense and space, and helicopters. Commercial offers a full range of aircraft ranging from the narrow-body (130-200 seats) A320 series to the much larger A350-1000 wide body. The defense and space segment supplies governments with military hardware, including transport aircraft, aerial tankers, and fighter aircraft (Euro fighter). The helicopter division manufactures turbine helicopters for the civil and para public markets.

Source:Morningstar

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Burlington Stores Inc

As economic stimulus was likely the primary contributor to Burlington’s 20% comparable growth relative to prepandemic first-quarter fiscal 2019 levels, we still call for normalized mid-single-digit revenue growth and low double-digit adjusted operating margins long term. We have a favorable view of the chain’s improvement initiatives but believe the shares’ trading price assumes a best-case scenario.

Burlington’s $2.2 billion in first-quarter sales sailed past our $1.6 billion estimate (which was in line with the chain’s fiscal 2019 performance; we had been more cautious about the cadence of the pandemic-related recovery). Cost leverage led to a 10.8% adjusted EBIT margin, up nearly 370 basis points from the same period in fiscal 2019. Management did not offer guidance, but indicated it plans full-year sales to be around 20% higher than fiscal 2019’s $7.3 billion, and our prior $8.0 billion target should rise toward $8.7 billion, accelerating a recovery we had expected to extend into fiscal 2022. Leadership models a full-year adjusted EBIT margin decline of 20-30 basis points from fiscal 2019’s 9.2%, and our prior 8.7% mark should rise accordingly.

Although we caution against reading too much into a quarter borne of exceptional circumstances (easy comparisons due to 2020 store closures, stimulus, and pent-up demand), we believe the performance highlights Burlington’s greater agility as it executes management’s plans for more opportunistic inventory purchases. The chain was not spared the effects of global freight supply challenges, but we believe its work to use its reserve inventory and large roster of vendors protected its ability to flow product. We do not anticipate the freight issues will linger, with normalization as supply and demand dynamics stabilize alongside the economy.

Profile

The third-largest American off-price apparel and home fashion retail firm, with 761 stores as of the end of fiscal 2020, Burlington Stores offers an assortment of products from over 5,000 brands through an everyday low price approach that undercuts conventional retailers’ regular prices by up to 60%. The company focuses on providing a treasure hunt experience, with a quickly changing array of merchandise in a relatively low-frills shopping environment. In fiscal 2020, 21% of sales came from women’s ready-to-wear apparel, 21% from accessories and footwear, 19% from menswear, 19% from home décor, 15% from youth apparel and baby, and 5% from coats. All sales come from the United States.

Source:Morningstar

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Dollar Tree Inc

Electronic digital interface at a stock exchange or bourse showing the fluctuating prices of stocks and shares on the markets charting their performance

Our planned change is primarily a result of a higher ongoing tax rate assumption (26% statutory rate from 2022 onward, from 21% prior), as a time value of money-related adjustment mostly offsets the impact of a softer near-term outlook amid heightened freight costs. Our long-term targets still call for mid-single-digit annual top line growth and high-single-digit adjusted operating margins. We do not see a buying opportunity at the shares’ current trading price, despite a mid-single-digit percentage pullback after the announcement.

Quarterly comparable sales rose 4.7% at the Dollar Tree banner (with about a 100-basis-point impact from adverse weather in February) and fell 2.8% at Family Dollar (after a 15.5% increase in the same period of fiscal 2020 as consumers stocked up in the early days of the pandemic). We had expected a 5.5% increase and a 4% decline, respectively. Management set full-year guidance of $5.80- $6.05 in adjusted diluted EPS, including a $0.70-$0.80 freight cost headwind on a per share basis. Our prior $6.28 mark (excluding forecast share buybacks) will likely fall toward the new range, considering Dollar Tree’s heightened dependence on spot freight markets in light of capacity constraints.

Management still expects Dollar Tree Plus (a format that includes a section with certain discretionary items that cost more than the traditional $1 Dollar Tree limit) and its combo stores (which combine elements from the Family Dollar and Dollar Tree assortments in rural areas) to drive growth long term. We view the concepts favorably and think they should allow the company to leverage the strengths of each banner and its purchasing power. Still, we do not anticipate the benefits will include the development of an economic moat, considering the intense competitive environment

Profile

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1 price (CAD 1.25 in Canada). Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

Source:Morningstar

Disclaimer

General Advice Warning Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.