Tag: US Market
Its 21% revenue growth impressed considering the chain lapped the early days of the pandemic (which included significant customer stock-up activity), but we mostly attribute the results to transitory factors. So, our long-term forecast still calls for mid-single-digit percentage sales growth and 3%-4% adjusted operating margins. We suggest investors seek a more attractive entry price, particularly considering elevated uncertainty as the customer habits normalize.
Costco posted 15% comparable growth excluding fuel and foreign exchange, well ahead of our 8% target, with the outperformance likely a result of greater-than-expected demand for discretionary items and recovering warehouse traffic (stimulus likely also played a role). Costco’s 3.7% operating margin was about 50 basis points higher than its prior-year mark and our estimate, reflecting cost leverage and reduced pandemic-related expenditures.
We are encouraged that around 70% of orders of big, bulky items (generally higher-value items like furniture, exercise equipment, and electronics) are being fulfilled by Costco Logistics, which the company purchased in early 2020. We believe the shift to in-house fulfilment will lift the profitability of orders of such goods as well as delivery times and customer service levels. We also believe these larger items remain an opportunity for Costco to benefit from rising e-commerce penetration, allowing for a broader assortment than what is available in-warehouse. While we continue to expect that the core of the value proposition will remain instore (as much of Costco’s assortment skews toward bulky, low-priced consumer goods that are difficult to ship economically), we support the company’s targeted investments in expanding its digital capabilities, which also include its growing online grocery offering.
Costco Wholesale Corp Company Profile
The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).
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.
He joined Fidelity in 2006 as an analyst, and then built strong track records at Fidelity Pacific Basin FPBFX from 2013 and Fidelity Emerging Asia FSEAX from 2017 until he became the successor to this fund’s previous manager in February 2019. Since taking over the following October, Dance has leaned on Fidelity’s deep emerging- markets analyst team for support, a strong group that continues to play a role here as Dance learns more about the emerging markets he didn’t invest in at his previous charges.
Dance, a successful regional strategy manager, still must show he can consistently apply his process to a broader universe. He’s a growth-oriented investor who buys four kinds of stocks–sustainable growers, niche companies, firms with macroeconomic tailwinds, and special situations–and holds them for three to five years.
Dance considers regional economics and macro views more than many of his peers, looking to accumulate exposure in regions or sectors in which he sees high growth potential. He turned defensive in February 2020 after learning of the coronavirus outbreak in China, selling expensive stocks like Brazilian investment manager XP while buying consumer staples stocks like Angel Yeast and healthcare stocks like Shenzhen Mindray.
The portfolio reflects Dance’s preferences. Its average holding has better profitability metrics and competitive advantages than those of its MSCI Emerging Markets Index benchmark and diversified emerging markets Morningstar Category. Such stocks often come at a cost: The portfolio’s average valuation measures like price/earnings, price/book value, price/sales, and price/cash flow are higher than those of its benchmark and typical peer. Despite some price risk, Dance has succeeded at his previous charges with this approach, so there’s reason for optimism.
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.
Anello had been a lead manager of this fund since 2012 and had worked with Main Street team founder Mani Govil since 2006, but the fund had been a mediocre performer under his watch, so his departure was not really a shock. Now the fund’s sole lead manager is Belinda Cavazos, who was hired in February 2020 to manage this fund and Invesco Rising Dividends OARDX. She previously spent three years at Boston Trust managing small and mid-cap funds with some success. But this fund is much larger than any of her previous charges, and turning it around will be no easy task.
This fund is a mid-cap counterpart to Invesco Main Street MSIGX, which tries to identify profitable, well-run companies trading at reasonable valuations. Cavazos has not made any major changes to the process, but she has tried to put her own stamp on the fund, especially since Anello left. She reduced the portfolio’s exposure to some interest-rate-sensitive sectors, notably real estate and utilities, and added to some cyclical names such as Vulcan Materials VMC and homebuilder
D.R. Horton DHI. She also reduced the overweighting in energy that the fund typically had under Anello and sold some large-cap names that didn’t really fit with the fund’s mid-cap mandate. The effect has been to make the fund less reliant on sector bets and more driven by stock-picking. So far, the results haven’t been great. In 2020, the fund trailed about two thirds of its midcap blend Morningstar Category peers, similar to its performance over the past three, five, and 10 years. Results were similarly disappointing in the first five months of 2021. It is hard to come to any firm conclusions based on such a short time period, but Cavazos will definitely need to achieve better results than this before concluding that the fund is on the right track.
This fund’s strategy is straightforward in most respects. It is similar to the approach used by Invesco Main Street MSIGX, but less tested. It earns an Average Process rating. Lead manager Belinda Cavazos and her six co-managers employ a version of the strategy developed over the years by Main Street team leader Mani Govil. They seek companies with strong management teams and a fundamental catalyst for future value creation over the next two to five years, such as pricing power, market share gains, or improving profitability.
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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L Brands Post Strong Margins
Bath & Body Works continued to impress with a 26% operating margin, a figure in line with luxury retailers. While some expense leverage probably came from sales that rose to $3 billion (up 83%, lapping roughly six weeks of COVID-related closures last year), we think some gross margin gains could stay, given their attribution to better merchandising. However, we also expect some gains to recede, as the promotional cadence is likely to pick up over time. For reference, sales in the first quarter of 2020 were just $1.65 billion, since locations were closed for half of the fiscal quarter due to COVID-related restrictions.
L Brands’ second-quarter outlook also provides a lift to our fair value estimate, with 10%-15% sales growth and $0.80- $1.00 in EPS anticipated; these marks are ahead of the $2.9 billion in sales and $0.53 in EPS we projected for the period. As such, we plan to lift our full-year sales and EPS estimates to more closely reflect probable first-half performance, though the firm did not provide full-year guidance. We plan to stand firm on our long-term projections, which include 2% sales and mid-single-digit EPS growth along with midteens operating margins. As the division of the VS and BBW segments approaches, we expect to have more clarity on the capital structures of the separate businesses, which will allow us to value the stand-alone brands properly. Until then, we will continue to model the two businesses under the same umbrella, rendering an outcome based on current capabilities.
L Brands is still targeting August as the official separation date for its two brands, though it provided few additional details. For VS, the company will aim for midteens operating margins, an objective that feels increasingly attainable, given the brand’s latest success. VS will maintain its recent focus on inclusivity in both the VS and Pink labels, with the hope of regaining consumer confidence and demand. For BBW, the firm intends to stay the course, considering the success it has achieved with its current strategy, though it has expressed interest in expanding into whitespace categories such as sustainable hair and skincare, a move we commend given the recent focus on “green” consumption. Both brands will be expanding buy online/pick up in store capabilities, especially as they transition to more off-mall locations, which should improve throughput and profitability.
In anticipation of the spin-off, the firm named new CFOs for the two independent companies. Bath & Body Works’ CFO will be Wendy Arlin, current senior vice president and controller for L Brands, who previously was an audit partner at KPMG. Victoria’s Secret’s CFO will be Tim Johnson, former CFO of Big Lots. We believe both individuals will bring important knowledge and expertise to the two new standalone entities. In particular, Johnson’s retail industry experience will be useful as VS attempts to maintain its current trajectory.
(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.
Financial technology companies in particular have garnered significant investor interest this year, perhaps pushing more startups to gopublic. Two other payments-related companies, Flywire FLYW and Paymentus PAY recently went to market. Flywire’s stock jumped about 46% and Paymentus’ went up about 36% on their first day of trading.
Marqeta has scaled quickly, fueled by the growth of financial technology, e-commerce, and the gig economy. But its future is anything but certain.
Marqeta’s clients include familiar tech names like Square SQ, AffirmAFRM, Uber UBER, DoorDash DASH, and Instacart. These companies use Marqeta’s platform to build payment experiences for their own customers or streamline business payments.
What’s Behind Marqeta’s Strong Revenue Growth
Most of Marqeta’s revenue comes from transaction fees, so processing volume is the name of the game. Marqeta has benefited from the accelerated shift to e-commerce and digital payments brought on by COVID-19. The company’s total processing volume reached roughly $60 billion in 2020, up from $21.7 billion the year before, according to the Marqeta’s SEC filing. The momentum has continued into 2021; Marqeta says its platform processed $24 billion in the first quarter.
With the boost in processing volume, Marqeta brought in $290.3 million in revenue in 2020, more than double its 2019 revenue.
While the past year has been sweet for Marqeta in terms of revenue growth, we have to look at the numbers with a grain of salt because they may not be indicative of the future. COVID-19 has impacted consumer spending patterns, boosting online purchases and demand for delivery services and contactless payments. While the need for virtual payment processing and card issuing may continue to trend upward, the dramatic shift seen during the pandemic will likely subside.
Despite the boost in revenue over the past year, Marqeta isn’t yet profitable. The company has shown a decline in net losses in recent years but still lost $47.7 million in 2020.
Marqeta expects to incur losses for the foreseeable future as the company continues to invest in its growth. Ultimately, the future is uncertain. And Marqeta acknowledges in its SEC filing that it may never achieve or sustain profitability.
Marqeta Has a Dependency Problem
Marqeta’s growth over the past year has mirrored the performance of its customers, particularly payments processing company Square, which generates most of Marqeta’s revenue. Square was responsible for 70% of Marqeta’s net revenue in 2020. That percentage rose to 73% for first-quarter 2021.
Square’s rapid growth during the pandemic has been a boon for Marqeta, but Morningstar senior equity analyst Brett Horn sees risk in customer concentration: “This tends to be mainly a growth issue, as customers have leverage to demand better pricing.”
The current term of Marqeta’s agreement with Square for Square Card expires in December 2024, and the current term of their agreement with Square for Cash App expires in March 2024. There is no guarantee that the relationship will continue on the same terms.
Losing revenue from Square, whether from Square’s poor performance or a severance of the relationship, would also have an adverse effect on Marqeta’s business.
Market Tailwinds Can Benefit Marqeta and Competitors
Horn and equity analyst Michael Miller believe there are significant opportunities for companies like Marqeta to draft off the secular trend toward electronic payments, which would act as a tailwind to card payment volumes. Euromonitor International, a market research firm, projects electronic payments will represent 46% of the total global transaction volume by 2025, up from 31% in 2017.
Horn sees competition between traditional players relying on scale and better pricing while newer upstarts like Marqeta try to win with services that better fit higher-growth areas. Industry growth creates room for new players, but Horn ultimately believes scale is the best form of long-term advantage in the space. This benefits existing players, like FIS and Fiserv, and gives them a window to replicate new offerings.
Miller said the rise of buy-now-pay-later offerings is another major trend in the card payments space. Such offerings allow consumers to pay for retail goods under an installment plan. “These firms are more prominent in Europe and Australia, but they’ve been investing heavily in the U.S. to gain market share,” Miller said. “That said, in my view, they have a difficult path to significant adoption in the U.S. since they don’t have a clear benefit over existing credit card products already available in the country.”
Marqeta already supports providers in this space, like Affirm and Klarna, and Marqeta’s global presence (the company is certified to operate in 36 countries) would allow it to take advantage of this growth outside of the United States.
Marqeta’s potential markets are growing and evolving, and it will have to grow and evolve with them. Profitability will take a back seat as the company pursues further growth and innovation.
(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.
In the quarter, Ralph Lauren saw a constant-currency sales decline of just 4% in Europe (our forecast was negative 19%) as strong e-commerce growth (owned up 79%) overcame store closures. Its sales in Asia and North America were close to our estimates. While sales have continued to decline in North America because of reduced distribution and less off-price selling, we view this strategy as favourable for Ralph Lauren’s brand strength, the basis of our narrow moat rating. We project long-term growth of less than 1% for the company in the region but anticipate mid- to highsingle- digit percentage growth in Europe and Asia on store openings, e-commerce, and wholesale expansion. For fiscal 2022, Ralph Lauren projected overall sales growth of 20%-25%, in line with our previous forecast (adjusted for the impending sale of Club Monaco, which generated $210 million in sales in prepandemic fiscal 2020).
Ralph Lauren reported an adjusted gross margin of 62.9% in the quarter, 140 basis points above our forecast, due to strong pricing and mix. Our long-term forecast calls for sustainable 63% gross margins.
As has typically been the case, Ralph Lauren closed the fourth quarter in a net cash position, with long-term debt of $1.6 billion more than offset by $2.6 billion in cash (net cash of about $13 per share). The firm will also receive cash soon (undisclosed terms) from the sale of Club Monaco, which it bought for about $52 million in 1999. Given its strong balance sheet, Ralph Lauren has reinstated its quarterly dividend of $0.6875 per share, as we had anticipated. We forecast its long-term dividend payout ratio at about 50%. We forecast limited buybacks in fiscal 2022 (just over $100 million) but increasing share repurchases in subsequent years. Our capital allocation rating is Standard.
(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.