Consumer Earnings...What You See Is What You Get!

CostcoWholesale (COST, $99.64 ) has reported fourth-quarter earnings of $1.39 a share, $0.08 better than the consensus estimate.

Revenues rose 11.9% year over year and comp-store sales increased 5% (+6% US, +2% International). Currency translation hurt international comps by 500 basis points. Inventories were well controlled, increasing 6.9% on the nearly 12% sales gain.

Earnings quality was fair. Although the company beat by $0.08 about $0.05 of that amount was driven by non-operating factors. A lower-than-expected tax rate added $0.02 to results, while higher-than-expected other income added an additional penny. Meanwhile, lower-than-expected preopening expenses added $0.01 while lower net income attributable to non-controlling interests add an additional penny.

No earnings guidance was given in the release.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------

YUM! Brands (YUM, $$71.10) has reported third-quarter earnings of $0.99 a share, $0.02 better than the consensus estimate.

Earnings quality was poor with all of the beat driven by non-operating factors. Indeed, lower-than-expected interest expense added a penny to the bottom line while a lower-than-expected tax rate and a lower-than-expected share count each added $0.01 as well. Absent these non-operating factors, YUM would have missed the consnsus by a penny.

Operationally, sales came in below the consensus estimate while labor costs were higher than expected by the Street. Lower-than-expected food and occupancy costs helped to lift the operating margin anyway, though.

Revenues rose 9.0% year over year to $3.57 billion. The consensus revenue estimate was $3.64 billion. U.S. Division same-store sales increased 6%, including growth of 7% at Taco Bell, 6% at Pizza Hut and 4% at KFC. In China, system sales increased 22%, prior to foreign currency translation. Same-store sales increased 6%, overlapping strong prior year same-store sales growth of 19%. Emerging markets system sales grew 10%, driven by 7% unit growth and 5% same-store sales growth. Developed markets system sales grew 1%. 

Worldwide operating profit grew 18%, prior to foreign currency translation, including 22% in China, 14% at Yum! Restaurants International (YRI) and 13% in the U.S. Worldwide operating profit increased 16%, after foreign currency translation. Worldwide restaurant margin increased 1.9 percentage points to 18.9%, including increases of 0.1 percentage points in China, 1.0 percentage point at YRI and 4.6 percentage points in the U.S. Restaurant margin increased 0.6 percentage points in China excluding Little Sheep. Worldwide system sales grew 6%, prior to foreign currency translation, including 22% in China, 4% at YRI and 1% in the U.S. Worldwide system sales growth was 8%, YRI same-store sales were negatively impacted by 1 percentage point due to the timing of Ramadan. 

For the full year, the company is guiding earnings to at least $3.24. The company's prior guidance was for EPS of at least $3.22. The consensus stands at $3.26.

-------------------------------------------------------------------------------------------------------------------------------------------------------------------

Safeway (SWY, $16.29) has reported third-quarter earnings of $0.45 a share, excluding non-recurring items, $0.03 better than the consensus estimate.

Earnings quality was only fair. The top line came in well below Street expectations and likely lead to today's weakness. A lower-than-expected tax rate added a penny to results.

Revenues fell 0.1% year over year to $10.05 billion. The consensus revenue estimate was $10.23 billion, The miss was primarily due to the disposition of Genuardi's stores and a lower Canadian exchange rate, partly offset by higher fuel sales. Identical-store sales, excluding fuel, were 0.1% for the quarter, which was below expectations due to a larger than expected decline in price inflation, partly offset by continued improvement in volume. 

The gross margin declined 56 basis points to 26.44% but 11 basis-points of that impact was from fuel sales. The remainder of the decline was due primarily to costs incurred to launch the just for U loyalty program, costs incurred to dispose of Genuardi's stores, slightly higher shrink expense, higher revenue from Blackhawk (a lower gross margin business) and changes in sales mix, partly offset by lower LIFO expense. 

For the full year, the company is guiding earnings to a range of $1.90 - $2.10, excluding non-recurring items. The consensus stands at $1.97.

Management noted that they "were encouraged that in the fourth quarter to date identical-store sales, excluding fuel, are running at 1.0% with slightly improved volumes and higher inflation." All said, they expect identical-store sales in the fourth quarter will be driven by increased just for U engagement, the roll out of our partner fuel loyalty program and the launch of their Wellness initiative.

Thoughts For June 28, 2012 1

O'Reilly Automotive (ORLY) has lowered their second-quarter comp guidance after the market close on Tuesday,  to 2.0% - 2.5% from 3.0% - 5.0% previously. The company now expects second-quarter earnings to be at the low end of the previously announced range of $1.13 - $1.17.  The lowered comp guidance reflects a slow start to April due to a pull forward in demand from the early Spring weather and below expectation comps in June following an improved sales pace in May. Competitor Autozone (AZO) presented at the Oppenheimer Consumer Conference in Boston that afternoon and said that they had seen some regional weaknesses in the first seven weeks of the quarter but otherwise refused to comment on their sales. Both stocks were hit on the ORLY guide down.


ORLY has now dropped through their 200-day moving average, while AZO has dropped to its 200-day. AAP, a third competitor has been well below its 200-day moving average since missing earnings back in May. Autozone's next earnings release isn't until September, thus their is more than enough time for the stock to join its competitors below the 200-day moving average. The stock has areas of support at $350, $340 and $330, implying downside of 2%, 5% and 8%, respectively. That would be drops of $5, $15 and $25 from the current quote. The stock last flirted with its 200-day back in August.

Thoughts for June 27, 2012 3

This one still looks like a pig to me. I got stopped out on it once when it popped back over the 200-day moving average. Sales had declined in the first quarter and I expect more of the same in the second. These guys also have exposure to Europe so the weakening euro will likely hurt them too. All said, I would not be surprised to see this stock drop to $18 and then eventually $15. Two points is 10% though with this stock trading at $20 so rallies can be painful!

Thought For June 27, 2012 Part 2

Danaher bouncing off its 200-day moving average here. The company will be reporting earnings on July 19th so there is time to trade a bounce here. DHR gets about 30% of its revenues out of Europe though, and the weak euro will likely have an impact on sales this quarter. EPS estimates haven't budged in the past sixty days really though so something to watch on the downside here.

All said, I look for weakening revenues out of Europe this quarter and maybe some cautious remarks on the conference call on the 19th. In the meantime, I wouldn't be surprised to see the stock drift about three points higher in the weeks leading up til then for about a 6% potential return.

Thoughts For June 27, 2012

Energy

The above chart shows oil inventories in the U.S. versus a 10-year average. With oil inventories high, it's likely the price of oil will continue to fall. This is a boon for transport stocks, which would benefit from the lower cost for fuel. Stocks that could benefit from this trend include: FDX, UPS, CSX, NSC, WERN and R among others.

Charts to keep on your radar: