For Immediate Release
Chicago, IL – June 27, 2022 – Zacks Equity Research shares Ulta Beauty ULTA as the Bull of the Day and DoubleDown Interactive DDI as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Walmart Inc. WMT, Kroger Co. KR and Dollar Tree DLTR.
Here is a synopsis of all five stocks:
Bull of the Day:
Ulta Beauty is a Zacks Rank #1 (Strong Buy) that operates as a retailer of beauty products in the United States. The company offers a wide range of products including cosmetics, fragrance, skincare, hair care, bath and body products, and salon styling tools in stores.
Unlike a lot of other stocks out there, the stock has held up well in 2022,. The question now is if this stock breaks out when the market recovers.
If investors look at recent earnings, rising estimates and relative strength, they see a stock that has a lot of prospects to run higher into the end of the year.
More About ULTA
The company was founded in 1990 and is headquartered in Bolingbrook, IL. It employs 16,500 people and has a market cap of $20 billion. Ulta sells more than 25,000 products from about 500 well-established and emerging beauty brands across all categories and price points.As of March, the company operated 1,308 retail stores across 50 states
The stock has a Zacks Style Score of "A" in Growth, but "D" in Value. Investors are betting that the growth the company continues to see, helps the stock come into the valuation. The stock pays no dividend.
Q1 Earnings Beat
On May 26th, ULTA reported a 42% EPS beat for Q1and beat on revenues. This was the company's eight beat on EPS in a row and the tenth out of the last twelve quarters.
Same Store Sales (SSS) came in at +18% and they affirmed their plan to open 50 new stores in 2022.
Ulta raised 2022 SSS guidance to 6-8% from 3-4% and hiked their 2022 EPS guidance to $19.20-20.10 v the prior $18.60. They took their revenue expectations higher as well, seeing $9.35-9.55B v the $9.20B expected.
Management said that solid execution, paired with strong guest demand, fueled their performance and helped with ULTA gaining market share.
The big earnings beat and raised guidance is helping estimates tick higher over the last month.
For the current quarter, estimates have gone from $4.15 to $4.76, a move of 15%. For the current year, we have seen a move of 8% higher, with estimates moving from $18.60 to $20.08.
And this momentum looks like it will continue, with next year's estimates moving from $20.59 to $22.00, or 7%.
With those estimates going higher, analysts are lifting their price targets for the stock.
JPMorgan reiterated their Overweight on the name, lifting their target to $480 from $460. Barclay also reiterated an Overweight and lifted their target to $491 from $469.
This year has not been kind to stocks. Many names are down 20% or more, with some tech stocks looking at serious losses anywhere from 50-80%.
In comparison, ULTA is only down about 1% in 2022. This relative strength should be a sign for investors that this stock is ready to breakout when market sentiment improves.
The Technical Take
Looking at the chart, the $340 level has been key all year, with buyers stepping up each time the stock dipped below. This area was the 61.8% retrace drawn from May 2021 lows to 2021 highs. If the stock can break above the post-earnings highs, $450 should be in the cards.
For longer-term investors, $505 is the 161.8% Fib extension draw from the April to May sell off.
Looking at the moving averages, the 200-day offered post-earnings support at $386. From there, the 50-day MA acted as resistance under the $400 level, but that has recently broken. Look for those levels to act as support as the stock tries to breakout.
When markets sell off, the stocks that hold price are likely the winners in the next bull cycle. Both the technical and the fundamentals are lining up for ULTA and all the stock needs is market sentiment to improve to get the break higher.
Bear of the Day:
DoubleDown Interactive is a Zacks Rank #5 (Strong Sell) that engages in the development and publishing of digital games on mobile and web-based platforms for casual players in South Korea.
Since the company came to market with an IPO in September of last year, the stock has slowly drifted lower. The first IPO trades were around he $18 mark, but now the stock trades under $10.
With the poor stock performance, investors should continue to avoid the name until the financials show something positive. For now, that is not the case.
About the Company
DoubleDown is headquartered in Seoul, South Korea. The company was incorporated in 2008 and was formerly know as The8Games.
The area of focus for the company is digital social casino games. DoubleDown offers games titled DoubleDown Casino, DoubleDown Classic, DoubleDown Fort Knox, and Undead World: Hero Survival games.
DDI is valued at $500 million and has a Forward PE of 7. The company holds a Zacks Style Score of "A" in Value, but "D" in Growth. The stock pays out no dividend.
The company reported EPS back in early May, seeing a 5% miss on EPS. This was the second miss in a row and the company has only beaten once in its short publicly traded life.
Net income was lower year over year, coming in at $18.5M vs the $19.4M last year. Revenues were lower as well, coming in at $85.5M vs $96.7M last year. Adjusted EBITDA was also lower, coming in at $26.9M v the 33.1M last year.
Investors did not respond well, selling the stock under the $9 level. The stock did rally all the way to $12, but with estimates going down, the bulls might be getting ahead of themselves.
Since this is an illiquid low market cap name, not many analysts cover the stock. However, the ones that do are taking their numbers lower over the last 60 days.
For the current quarter, estimates have fallen from $0.40 to 0.36, or 10%. For the current year, the numbers have dropped 9.6%, from $1.66 to $1.50.
This is a low volume stock with big spreads. So the short-term charts can be tricky. However, if you zoom out it is clear that the stock has done nothing but bleed since the IPO.
For now, the stock is an avoid as it trades below its 50-day moving average at $11. If the stock can get above this level, then perhaps it can trade the 200-day MA near $14.
However, all signs point to this stock continuing to struggle until they start beating their numbers. If new lows come, look for the $6.50, which is the 161.8% Fib extension drawn from the recent lows to highs.
Casino and gaming names have been hard enough. Investors don't get excited when you start adding extra elements like digital casinos and foreign companies. Look for DDI to struggle unless they start growing their numbers.
Why Are Walmart (WMT) Shares Sinking?
Several retail companies are grappling with supply-chain headwinds and Walmart Inc. is not immune to it. Supply-chain bottlenecks, escalated costs and persistently elevated inflation weighed on the company's first-quarter fiscal 2023 results, wherein management lowered its earnings per share (EPS) guidance for the fiscal. Apart from this, the company's results were somewhat affected by divestitures in the International segment.
The Zacks Consensus Estimate for the current fiscal-year EPS has gone down from $6.43 to $6.40 over the past 30 days. Shares of this currently Zacks Rank #4 (Sell) company, have declined 13.5% in the past three months compared with the industry's decline of 15.6%. Let's delve deeper.
What's Hurting Walmart?
The gross margin at Walmart U.S. fell 38 basis points (bps) in the first quarter of fiscal 2023 due to an adverse product mix, high supply-chain costs and increased markdowns. Most of the decline was due to the supply chain, fuel and e-commerce fulfillment expenses.
Overall, WMT's consolidated gross profit margin contracted by 87 bps, primarily due to Sam's Club, wherein the gross margin fell 219 bps. This was attributable to supply-chain costs, a fuel mix, inflation and markdowns stemming from the delayed inventory. Management expects the gross margin to remain under pressure in the second quarter, though it is likely to improve sequentially.
Moving on, SG&A costs escalated by 39 bps as a percentage of sales due to higher wage costs at Walmart U.S. The operating income at constant currency or cc fell 22.7% to $5.3 billion. Consolidated operating expenses as a percentage of sales increased by 45 bps year over year, stemming mainly from elevated wage costs at Walmart U.S. Some of the cost headwinds are likely to persist.
Walmart completed the divestiture of its businesses in Argentina, the United Kingdom and Japan during the first quarter of fiscal 2022. We note that Walmart's overall revenues in the first quarter of fiscal 2023 were hurt to the tune of about $5 billion by divestitures related to the Walmart International business and $0.4 million due to adverse currency movements.
The Walmart International segment's net sales fell 13% to $23.8 billion. Divestitures hurt the segment's net sales by $5 billion and currency movements had a $0.4 billion adverse impact. On a cc basis, net sales dropped 11.6% to $24.1 billion. The operating income, on a cc basis, slumped 33.7% to $0.8 billion.
A Look at Q1 & Ahead
The company posted soft first-quarter fiscal 2023 earnings. Management stated that its U.S. business' operating income was mainly hurt by higher costs related to staffing, an adverse mix due to the lower percentage of general merchandise and fuel costs and supply-chain woes.
The soft earnings results were a product of the unusual economic landscape, with U.S. inflation levels (especially food and fuel) creating greater-than-expected pressure on margins and operating expenses. WMT's adjusted earnings of $1.30 per share tumbled 23.1% from the year-ago period's figure of $1.69 and missed the Zacks Consensus Estimate of $1.46.
Management now expects the consolidated operating income to decline around 1% at cc and remain flat, excluding divestitures. The consolidated operating income was previously expected to grow nearly 3% at cc and at a greater rate than net sales, excluding divestitures. Management now envisions the EPS to decline nearly 1% in fiscal 2023 and remain flat year over year, excluding divestitures.
Earlier, the EPS was likely to grow in the mid-single-digit range. Excluding divestitures, it was expected to rise 5-6%. For the second quarter of fiscal 2023, the consolidated operating income and the EPS growth are expected in the range of flat to a slight increase.
While Walmart's robust omnichannel efforts are likely to continue being a driver, the abovementioned costs cannot be ignored in the near term.
Solid Picks You May Look at
Here are some better-ranked stocks – Kroger Co. and Dollar Tree. You can see the complete list of today's Zacks #1 Rank stocks here.
Kroger, a renowned grocery retailer, sports a Zacks Rank #1. Kroger has a trailing four-quarter earnings surprise of 20.3%, on average.
The Zacks Consensus Estimate for KR's current financial-year sales and EPS suggests growth of 6.7% and 5.7%, respectively, from the year-ago period.
Dollar Tree, a discount variety retail store operator, sports a Zacks Rank #1. The company has an expected EPS growth rate of 15.5% for three to five years.
The Zacks Consensus Estimate for Dollar Tree's current financial-year sales suggests growth of 6.7% from the year-ago period. DLTR has a trailing four-quarter earnings surprise of 13.1%, on average.
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