Market Insights

Traditional retail stocks are having an explosive week as companies like Under Armour report strong earnings. Is it the start of a new trend that will last into yearend?

The athletic-apparel company’s sales topped estimates by about 5 percent, but earnings were almost twice the forecast amount. Guidance was also well above consensus, drawing a string of price-target hikes from firms including Deutsche Bank, William Blair, UBS and Oppenheimer.

Under Armour (UAA) CEO Patrik Frisk cited “substantially lower off-price sales [ and ] reduced promotional and markdown activities.”

UAA’s news follows the recent trend of widening profitability (for example, Tesla) as companies raise prices in the face of surging demand. Meanwhile supply-chain constraints have caused less damage than feared. It also comes at a potentially important time, with the holidays approaching and reduced coronavirus infections letting consumers return to traditional shopping centers.

Speaking of shopping centers, Simon Property Group (SPG) is the largest owner of malls in the U.S. It also beat estimates, raised guidance and beefed up its dividend. “Occupancy gains continued [ and ] retailer sales accelerated,” CEO David Simon explained. “Demand for our space from a broad spectrum of tenants is growing.”

Capri (CPRI), the parent of Michael Kors and Versace, also boasted of healthy margins. Earnings shot past estimates by a whopping 61 percent despite sales beating by just 2 percent. CEO John Idol cited “greater than anticipated gross margin expansion.” He added that management’s initiatives are “offsetting the COVID-19 related industry headwinds including supply chain delays and increased transportation costs.”

UAA, SPG and CPRI jumped to new multiyear highs following the results. That’s helping give the SPDR S&P Retail ETF (XRT) its biggest weekly gain since March.

Bed Bath, Kroger

Aside from earnings, other traditional retailers have gained on different kinds of news. Bed Bath & Beyond (BBBY) jumped 15 percent yesterday after announcing a business overhaul and strategic actions. The business transformation included the launch of a digital market to sell third-party merchandise. It also teamed with grocery giant Kroger (KR) to cross-sell home and baby products.

The strategic action was potentially more important: accelerated share buybacks. Once again, strong pricing trends seem to play a role. “Corrective and surgical pricing actions we’ve implemented are resulting in a trend toward expected gross margin,” CEO Mark Tritton declared. “We are preparing for the peak Holiday season and are particularly excited about the new future sales channels that we’ve announced today.”

The combination of events triggered a so-called short squeeze. That’s when traders and hedge funds who’ve positioned against the stock rush to cover their bearish positions. (BBBY also had a large short squeeze on June 2.) Other retailers with elevated short interest rose, including Macy’s (M), Abercrombie & Fitch (ANF) and Gap (GPS).

Avis Budget

Speaking of short squeezes, car-rental agency Avis Budget (CAR) doubled in value on Tuesday after reporting numbers that were much stronger than expected. Strong pricing and margins were the story once again. Revenue beat estimates by less than 10 percent, while earnings were 60 percent higher than forecast. The company, which has benefited from used-car price inflation, also said it will add more electric vehicles (EVs) to its fleet.

Speaking of EVs, Ford Motor (F) said October sales rose 195 percent. Conventional SUV volume also remained healthy as the Bronco franchise continues to thrive. Separately, the 118-year old company announced plans to pay off $5 billion of high-yielding debt in a bid to recover its investment-grade credit rating.

Albermarle (ALB), which provides lithium for EV batteries, also jumped to new all-time highs after revenue and guidance surprised to the upside.

Qualcomm Jumps

This week has fewer technology results, but one important semiconductor stock jumped on strong results: Qualcomm (QCOM). The iPhone supplier’s profit, sales and forecasts flew past Wall Street’s consensus numbers. Other chips, like Internet of Things (IoT) and RF front-end (for 5G stations), grew 66 percent and 45 percent, respectively.

QCOM’s results also suggested that the global semiconductor crunch could be starting to ease.

Arista Networks (ANET), a rival of Cisco Systems (CSCO), had its biggest gain in seven years after earnings, revenue and guidance beat expectations. “We are experiencing strong demand for our pioneering client to cloud networking portfolio across all of our customer sectors,” CEO Jayshree Ullal said.

Other technology and communications companies struggled:

• Roku (ROKU): Supply-chain issues took a bite out of player sales. The streaming-video company missed top-line estimates and projected weak business in the current quarter.
• Activision Blizzard (ATVI): The videogame publisher predicted disappointing holiday sales because two important titles will be delayed: “Diablo IV” and “Overwatch 2.” ATVI cratered 14 percent yesterday, its biggest one-day selloff since the financial crisis in late 2008.
• Chegg (CHGG): The online education company, which thrived during the trend during the pandemic, plunged a record 49 percent after revenue and guidance missed. “Over the last year and a half, we experienced extraordinary growth … however, in late September it became clear to us that the education industry is experiencing a slowdown,” explained CEO Dan Rosensweig. Is CHGG’s weakness another sign of things returning to normal?

Moderna Slumps

Few companies benefited more from coronavirus than vaccine developer Moderna (MRNA). But it missed estimates by a wide margin this morning. Per-share earnings of $7.70 lagged the $9.05 estimate. Revenue of $4.97 billion was $1.25 billion less than expected. Full-year sales of $15-18 billion trailed the $20 billion forecast provided in August. MRNA dropped 18 percent on the news.

At least one other noteworthy company emerged from this week’s quarterly results: telecom provider Lumen Technologies (LUMN), which reported strong profitability. It’s also cutting capital expenditures and completed its share buyback program. Some analysts have said LUMN’s fiber assets are undervalued. Given its high debt levels and relatively low earnings multiples, investors may watch the stock for more strategic events and cash-flow improvements.

In conclusion, another big week of earnings season is done with most companies beating estimates. The main theme was a rebound in traditional retailers thanks to strong pricing. Meanwhile companies that benefited from the pandemic, like MRNA and CHGG, struggled. QCOM’s healthy numbers also suggested that the semiconductor crunch may be lifting.