Red Lobster is (was) the largest casual dining seafood chain in the United States, serving over 64 million customers per year. It also recently accounted for more than half of all casual dining seafood chain locations. Red Lobster had purchased 20% of all North American lobster tails and 16% of all rock lobsters sold worldwide. Imagine the volume of drawn butter doled out! It appears that there may have been conflicts of interest for Red Lobster’s major equity owner who was also its major shrimp supplier. Red Lobster’s shrimp supplier may have stuffed the channel in this case, but supply/demand dynamics are creating both positive and negative results across the earnings landscape.
Home improvement retailer Lowe’s# did not have a great quarter as do-it-yourself consumers are still feeling pinched. Year over year sales comparisons were down 4% due to 3% lower transactions and 1% lower average ticket, while margins were impacted by higher costs. Lowe’s expects Q2 2024 margins to be similarly pressured due to continued investments in its supply chain. We heard a similar refrain from Home Depot# last week.
Target# reported an earnings miss this week on 4% lower comparable sales versus the prior year. This was due to about 2% less traffic and 2% less average spending. Consumers bought fewer everyday items such as groceries and paper towels along with discretionary goods like apparel and home décor items. Target had announced on Monday that it was cutting prices on 5,000 everyday items, including milk, bread, paper towels and diapers. Too much supply at high prices and too little demand led to weak results and a 7% drop in the stock post-earnings.
Meanwhile, homebuilder Toll Brothers# reported good quarterly results this week amid continued demand for new homes near $1 million. Management highlighted that demand has also been strong in the first three weeks of May. Toll Brothers raised net pricing in about 60% of its communities, resulting in an approximate $10,000 increase per home across the company. On the other hand, sales of previously owned homes in the U.S. decreased 1.9% in April from the prior month to a seasonally adjusted annual rate of about 4.1 million. The national median existing-home price rose nearly 6% in April from a year earlier to $407,600. That was the highest price for any April going back to 1999. Limited supply and high demand at work.
Nvidia# reported its much-anticipated quarter last night, citing revenue and earnings above expectations. The company guided higher into next quarter as well. Demand for its AI chips continues to be strong, up 23% sequentially, selling mostly to data centers which are building out AI capabilities. Lack of adequate supply and exceptionally strong demand has led to positive results. Elsewhere in the AI space, Microsoft# is using Qualcomm#-developed chips for its AI-powered Copilot+ computers. These PC’s will have a “recall” function that gives the computer a photographic memory of your work, searches, and live interactions in meetings. More of the AI work will be pushed out to the device, such as Apple’s# and Samsung’s new AI-powered phones. The result is that more memory and new semiconductor chips will be needed to power all of this new AI workload.
Federal Reserve minutes from the April/May meeting out yesterday showed a more hawkish tone than some expected, meaning another nod toward “higher for longer” interest rates and less chance of multiple rate cuts this year. The probability for a June rate cut is less than 4%. Rate cut probabilities increase to about 24% for July and to over 65% for September. Federal Reserve speakers have been out in force this past week with updated but mixed messages. Cleveland Fed President Loretta Mester said policy is restrictive, but policymakers need to wait for more evidence about the path of inflation before adjusting interest rates. Mester, who previously telegraphed three rate cuts this year, said three reductions may not now be appropriate for 2024 given Q1 inflation figures. San Francisco Fed President Mary Daly said she is not yet confident that inflation is cooling to the Fed’s 2% goal. Fed Governor Christopher Waller said that he does not think further rate increases will be necessary. However, he will need some convincing before he backs cuts anytime soon.
Against this backdrop, 10-year Treasury yields have declined toward 4.4% and May stock market gains have reversed April declines. Earnings are being driven by supply/demand dynamics that differ by industry, but higher quality companies are being rewarded for taking advantage of the cycle. The Fed will continue to fight the inflation battle as investors come to grips with an extended period of higher prices and interest rates. That is until demand and earnings slow down below expectations, which could lead to some indigestion after too much of a good thing. Getting the price/volume equation right will be key for individual companies going forward. “All you can buy” at a high price point beats “all you can eat” as a loss leader any day.
Birthdays: Jeopardy champion and host Ken Jennings turns 50 today along with singer Jewel, while comedian Drew Carey turns 66 and actress Joan Collins turns 91.
Christopher Crooks, CFA®, CFP® 610-260-2219