Is Lululemon Athletica (LULU) Set to Surge 18%?

Posted on by The INO.com Team

Shares of Lululemon Athletica Inc. (LULU) have witnessed continued momentum. Over the past month, the stock has gained 8.7%. Its recent uptrend appears to be the result of a research note issued on November 17 from analysts at Truist Financial, which initiated coverage on LULU shares.

The firm set a “Buy” rating and a $500 price target on LULU stock. This target implies more than 18% upside from the current price level.

Truist Financial likes LULU’s growth profile compared to other retailers in the athletic apparel space. In their coverage of LULU, analysts noted that they “believe Lululemon has some of the strongest brand loyalty in the activewear industry as its direct to consumer model enables it to invest more in product & foster deeper customer relationships.”

This brand loyalty, combined with the retailer’s continued expansion initiatives in several key global markets, could provide significant growth that other retailers may struggle to achieve in the upcoming years.

LULU’s shares have surged more than 13% over the past six months and 30.6% year-to-date to close the last trading session at $422.44. Moreover, the stock is trading above its 50-day and 200-day moving averages of $393.67 and $366.77, respectively, indicating an uptrend.

Now, let’s discuss several factors that could impact LULU’s performance in the upcoming months:

Addition to S&P 500 Index

Inclusion to the S&P 500, the most widely followed benchmark of the U.S. stock market, added to an already winning year for LULU. The Canadian athletic clothing company joined the major equity benchmark before the opening of trading on October 18.

“We look upon the addition of shares to the major index as a potential catalyst for incremental interest and buying,” Oppenheimer analyst Brian Nagel wrote in a note to clients.

Despite prevailing economic uncertainty, higher-income consumers' willingness to keep spending on renowned apparel brands, including Lululemon and Abercrombie & Fitch Co., lifted shares.

Positive Recent Developments

On September 27, LULU and Peloton Interactive, Inc. (PTON) announced a five-year strategic global partnership through which Peloton will become the exclusive digital fitness content provider for Lululemon, and Lululemon will be the primary athletic apparel partner to Peloton.

This multi-dimensional agreement brings together the best in fitness content and athletic apparel to inspire a combined community of more than 20 million members and guests globally. This collaboration will enable Lululemon to enhance its brand awareness, acquire more customers, and generate incremental revenue through PTON’s online channels and physical stores.

On June 6, lululemon and Xponential Fitness, Inc. (XPOF), the largest global franchisor of boutique fitness brands, renewed their partnership, bringing an expanded selection of digital workouts to Lululemon Studio. This collaboration builds upon the success of the initial launch last October and further enhances the distinctive offerings available to Lululemon Studio members.

Robust Financial Performance in the Last Reported Quarter

The athletic apparel retailer reported sales and earnings that surpassed Wall Street’s estimates in the second quarter of fiscal 2023. LULU reported net revenue of $2.21 billion, beating the analysts’ estimate of $2.17 billion. This compared to the revenue of $1.87 billion in the second quarter of 2022.

The company’s sales were fueled by solid growth internationally, including a 61% increase in China. LULU’s CEO Calvin McDonald said e-commerce and in-store sales are performing “incredibly well” in China. The retailer has 107 stores in the country and plans to open nearly 35 stores internationally during the ongoing fiscal year, and the majority will be in the region, McDonald added.

Moreover, lululemon opened ten net new company-operated stores during the second quarter, ending with 672 stores.

LULU’s gross profit grew 23% from the year-ago value to $1.30 billion. Its income from operations rose 19.5% from the year-ago value to $479.26 million. The company’s net income increased 18% from the prior year’s period to $341.60 million. Its earnings per share came in at $2.68, above the consensus estimate of $2.54 and up 18.6% year-over-year.

As of July 30, 2023, the retailer’s cash and cash equivalents stood at $1.11 billion, compared to $498.83 million as of July 31, 2023. Its current assets came in at $3.32 billion versus $2.39 billion as of July 31, 2022. Inventories at the end of the fiscal 2023 second quarter increased 14% to $1.70 billion compared to $1.50 billion at the end of last year’s second quarter.

Upbeat Full-Year 2023 and Long-Term Outlook

“Our performance remained strong in Q2 as both revenue and EPS exceeded our expectations. Our ongoing momentum is a reflection of our portfolio approach to growth, differentiated business model, and innovative product assortment. We are excited about our opportunities in the second half of the year and look forward to continue delivering on our Power of Three ×2 growth plan,” said Meghan Frank, LULU’s Chief Financial Officer.

For the third quarter of fiscal 2023, the retailer expects net revenue to be in the range of $2.165 billion to $2.190 billion, representing growth of approximately 17% to 18%. LULU's earnings per share are anticipated to be in the range of $2.23-$2.28 for the quarter.

For the full year, LULU expects net revenue to be between $9.51-$9.57 billion, representing growth of 17%-18%. This is above the prior guidance of $9.44-$9.51 billion. The apparel retailer's earnings per share are expected to be between $12.02 and $12.17 for the year, compared to the previous range of $11.74 to $11.94.

The company's Power of Three ×2 growth plan suggests a doubling of the business from 2021 net revenue of $6.25 billion to $12.5 billion by 2026. The key pillars of this ambitious plan are product innovation, guest experience, and market expansion. The growth strategy includes a plan to double men’s, double direct-to-consumer, and quadruple international net revenue relative to 2021.

Impressive Historical Growth

LULU’s revenue and EBITDA have grown at respective CAGRs of 31.7% and 36.4% over the past three years. The company’s EBIT has increased 39% over the same timeframe, while its net income and EPS have improved at CAGRs of 23.1% and 24.2%, respectively.

Additionally, over the same period, the company’s total assets have grown at a CAGR of 19.7%, and its levered free cash flow has increased at a 30.9% CAGR.

Favorable Analyst Estimates  

Analysts expect LULU’s revenue to increase 17.8% year-over-year to $2.19 billion for the third quarter ending October 2023. The consensus earnings per share estimate of $2.28 for the ongoing quarter indicates a 14% year-over-year improvement. Moreover, the company has topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

The company’s revenue and EPS for fiscal year (ending January 2024) are expected to grow 18.3% and 20.9% year-over-year to $9.59 billion and $12.17, respectively. For the next year 2025, Street expects LULU’s revenue and EPS to increase 13.4% and 15% from the previous year to $10.88 billion and $14, respectively.

Bottom Line

LULU’s revenue and earnings beat analysts’ expectations in the last reported quarter. The apparel retailer posted solid financial results and raised its full-year 2023 guidance.

CEO Calvin McDonald said, “Our Q2 results highlight the ongoing strength of the business amid a dynamic operating environment. I am proud of how our teams continue to deliver on our vision and offer an exciting pipeline of new products and experiences to our guests around the world. Our continued ability to gain market share and bring new customers into the brand illustrates the significant runway ahead for lululemon.”

The company’s continued business momentum reflects its differentiated business model, a diverse and innovative product assortment, and strategic initiatives to expand its brick-and-mortar footprint.

LULU’s stock is up more than 30% year-to-date and could climb even higher. Despite weakness in the overall apparel market, lululemon had a strong year owing to several factors, including solid financial performance, joining the S&P 500 index, and more.

Given its solid financials, impressive price performance, improving profitability, and optimistic long-term outlook, LULU is an ideal buy now.

What's in Store for Retail Stocks This Earnings Season?

Posted on by The INO.com Team

Amid soaring inflation that continues to burden consumer budgets, there appears to be a prevailing sense of optimism. Early Black Friday discounts in October were notably higher than in past years, indicating retailers’ concerns about potential subdued demand during the pivotal holiday shopping period.

Several of America's largest retailers have begun rolling out Black Friday sales events this week. According to studies, consumers are expected to spend an average of $567 during Black Friday and Cyber Monday sales, a 13% increase year-over-year. This trend is driven by shoppers pursuing the best deals amid the economic strains of high prices and interest rates.

The expected average spending sets a record for Deloitte’s annual Black Friday-Cyber Monday survey, with about 84% of shoppers expressing confidence in adhering to the budgets they established in September.

Despite ongoing increases in living costs impacting household budgets, around 74% of consumers plan on taking advantage of the November sales this year. According to the National Retail Federation, holiday spending is predicted to grow between 3% and 4% annually. This year’s estimated holiday spending falls between $957.3 billion and $966.6 billion.

Shopping trends are shifting from physical stores to digital dominance. Data from Adobe Analytics reveals that in 2022, approximately 69% of Black Friday shopping was conducted online, leading to record-breaking sales worth $9.2 billion.

U.S. e-commerce sales comprised 21.4% of total retail sales in 2023's third quarter, reaching $271.7 billion, a 7.8% year-on-year growth, according to Digital Commerce 360's analysis of U.S. Department of Commerce data. Concurrently, total retail sales for the quarter rose by 3.2% to reach $1.267 trillion.

Online shopping, which gained substantial popularity during the COVID-19 pandemic and continues to maintain this momentum, is anticipated to grow between 7% and 9% this holiday season, contributing significantly to overall spending.

However, McKinsey’s study found that U.S. consumers are less likely to overspend this holiday season than last year, potentially due to high inflation and escalating interest rates that have driven credit card annual percentage rates (APRs) to new peaks.

With retailers American Eagle Outfitters, Inc. (AEO), Abercrombie & Fitch Co. (ANF), Urban Outfitters, Inc. (URBN), and Kohl's Corporation (KSS) set to unveil their earnings reports on November 21, let’s see what’s in store for these retail stocks.

American Eagle Outfitters, Inc. (AEO)

Young adult apparel retailer AEO appears well-positioned to capitalize on its robust brand appeal and steady demand propelled by its engaging product range and innovative marketing endeavors. The corporation's impressive growth can be ascribed to favorable demand for its flagship brands and strong efforts in branching into new markets.

In the previous quarter, AEO reported revenue of $1.20 billion, a 0.2% year-on-year increase, on par with the industry analyst estimates. The last reported quarter proved exceptionally productive for the retailer, with EPS surpassing projections, primarily due to robust growth in the Aerie segment. This brand continues demonstrating a stunning growth trajectory, as illustrated by its stellar performance in the first quarter of fiscal 2023.

Additionally, AEO's heightened revenue forecasts and operational income guidance for the fiscal year 2023 (operating income is expected to be in the range of $325 to $350 million, up from prior guidance of $250 to $270 million) – are strikingly optimistic.

The company's progressive strategies, robust omnichannel capabilities, and focus on efficient stock management likely contributed to an elevated top and bottom line for the forthcoming quarter's performance. A strong digital presence is projected to further bolster the fiscal third quarter performance.

As 2023's second half unfolds, AEO expects a positive reception for its early autumn merchandise, a development expected to amplify fiscal third-quarter sales, especially for the Aerie brand. AEO also predicts greater gross margins, fueled by reduced freight, product costs, and markdowns.

However, AEO has been contending with an upswing in corporate compensation, incentives, and other corporate expenses, only partially mitigated by cost efficiencies. A surge in selling, general and administrative (SG&A) expenses has also been observed. An uncontrolled increase in costs and expenses could affect the company's margins and profitability in the quarter awaiting results.

AEO is expected to surpass top and bottom-line growth when it reports third-quarter fiscal 2023 results. Analysts expect its revenue and EPS for the fiscal third quarter ending October 2023 to increase 3.3% and 15.3% year-over-year to $1.28 billion and $0.48, respectively.

AEO’s shares have gained around 40% year-to-date. Wall Street analysts expect a price target of $19.25 in the next 12 months, indicating a potential downside of 1.8%.

Abercrombie & Fitch Co. (ANF)

With a market cap of over $3.7 billion, young adult apparel retailer ANF has been gaining from consistent growth momentum in its Abercrombie brand and a systematic improvement in its Hollister brand. Strategic store optimization initiatives and reduced freight expenses are aiding the company's thriving bottom line.

ANF has emphasized that efforts to enhance the brand image of Hollister have begun yielding positive results. The company’s Always Forward Plan, which encompasses strategic investments in stores, digital platforms, and technology, promises to bolster its positive trajectory.

It has been experiencing demand upsurge attributable to successful rebranding initiatives that align with prevailing fashion trends. Additionally, ANF's persistent endeavors to diversify its inventory across all brands have enticed customers to explore a wider product range, potentially promoting top-line growth in the soon-to-be-reported quarter.

For the fiscal third quarter, decreased freight expenses and substantial growth in average unit retail (AUR) is projected to facilitate margin expansion. Management forecasts an 8% to 10% operating margin in the third quarter, a significant increase from 2.4% in the year-ago quarter. This expansion is driven by a rise in gross profit rate spurred by lower freight costs, higher AURs, and moderate operating expense leverage on increased sales.

Analysts expect its revenue for the fiscal third quarter ending October 2023 to increase 11.6% year-over-year to $982.40 million, while its EPS for the quarter is expected to increase significantly year-over-year to $1.07.

ANF is venturing into the earnings season, with Wall Street analysts anticipating a price target of $66.50 in the next 12 months, indicating a potential downside of 9.2%.

Urban Outfitters, Inc. (URBN)

URBN, a retail and wholesale consumer goods company, has reaped significant advantages from its strategic initiatives. The technological advancements, rationalization of store count, and focused merchandising tactics have all played pivotal roles in reinforcing their prosperity.

The robust reinforcement of its direct-to-consumer operations, the enhanced productivity across existing channels, the expansive offering of products, and the optimized inventory management significantly strengthened the company's positioning.

URBN’s exponential acceleration of digital activities has further solidified its market presence. A key contributor is URBN's Nuuly, a subscription-based rental service that amplifies the company's premier brands among its customer base instead of eroding wholesale profitability.

Nuuly is projected to attain profitability by the third or fourth fiscal quarter of 2023. Although relatively new, the subscription service has thrived, with revenues nearly doubling year-on-year in URBN's second quarter due to an impressive 85% surge in active subscribers.

An uptick in consumer demand at the beginning of the fiscal third quarter is poised to drive total company sales into high single-digit growth. This progress, backed by a mid-single-digit increase in the Retail segment's comparable sales and a substantial double-digit spike in Nuuly's segment sales, places URBN in a favorable position.

The financial prognoses indicate a gross margin improvement of over 400 basis points year-over-year, driven by an increase in initial product margins due to decreased inbound freight costs and merchandise markdowns.

However, challenges presented by a rigorous operational environment, inflationary pressures, and currency volatility may have posed barriers for the company. Persistent struggles with higher SG&A expenses and subdued wholesale division sales have been troublesome for the retailer. Consequently, deteriorated wholesale unit sales could partially counter the fiscal third quarter's overall sales.

For the fiscal third quarter ending October 2023, URBN is likely to surpass top and bottom-line figures when it releases third-quarter fiscal 2024 results on November 21, after market close. Analysts expect its revenue and EPS for the quarter to increase 7.4% and 106.5% year-over-year to $1.26 billion and $0.83, respectively.

Wall Street analysts expect a price target of $37.92 in the next 12 months, indicating a potential upside of 3.2%.

Kohl's Corporation (KSS)

Leading omnichannel retailer KSS, boasting a market cap exceeding $2.83 billion, continues to prosper from its core initiatives like refining the customer experience, streamlining value strategies, orderly inventory and expense management, and solidifying its financial structure.

To augment customer experience, the retail giant persistently works toward evolving sectors like gift services, Sephora collaboration, home decor, and longer-term new stores. KSS's tactical alliances, notably with Amazon, along with the consistent implementation of omnichannel approaches, have proven fruitful.

Adding to its recent successful ventures, the early savings holiday event "Deal Dash," held from October 9 across over 1,100 KSS outlets and online at Kohls.com, is expected to impact its third-quarter outcomes positively.

KSS rolled out an innovative strategy for attracting potential customers by adding "+ Sephora" to its store signs, a testament to its significant partnership with the beauty retail giant established in 2020.

However, KSS currently contends with issues of rising product costs, which are impacting its profit margins. In the fiscal second quarter of 2023, its gross margin declined to 39%, while SG&A expenses increased 1.6% year-over-year to $1.30 billion.

The surge in SG&A costs could potentially hinder performance results in the forthcoming quarter, with management anticipating nearly a 3% increase due to supplementary store-related investments and the inauguration of 45 small Sephora outlets.

KSS’ digital sales declined 17% year-over-year in the second quarter of 2023 and 18% year-to-date, with clientele reversion to physical stores identified as one of the causes. Alongside this, the elimination of online-only promotions was seen to affect sales. For fiscal 2023, the company projects net sales to decline between 2% and 4%, triggering concerns for future quarters.

KSS could register top-and-bottom-line declines for the fiscal third quarter of 2023. Analysts expect its revenue and EPS for the quarter to decline 2.6% and 54.9% year-over-year to $3.95 billion and $0.37, respectively.

Notably, upcoming earnings may be affected by backlash from a "woke" dispute beginning in May over Pride-themed merchandise sold by KSS. Although this controversy only accounted for two months of the second quarter, it is still unknown if the backlash from conservative consumers further intensified and potentially harmed the company’s performance. Regardless, this issue should not be overlooked, particularly considering KSS' demographic of clientele.

Even though shares of KSS declined about 17% over the past year, it gained over 22% over the past five days. Wall Street analysts expect a price target of $24.90 in the next 12 months, indicating a potential downside of 1.5%.

Analyzing Microsoft’s (MSFT) Soaring Success – What’s Next?

Posted on by The INO.com Team

Shares of Microsoft Corporation (MSFT) have been performing exceptionally well lately, with the stock surging more than 12% over the past month. Moreover, it hit a new 52-week high of $376.35 in the previous session. The stock has gained more than 20% over the past six months and nearly 55% over the past year.

The rally in the stock kicked off a couple of days after Microsoft reported upbeat fiscal 2024 first-quarter results. Since then, the stock has added more than $350 billion to its market capitalization. MSFT is the second-largest component in the S&P 500 with a market cap of $2.796 trillion, behind only Apple Inc. (AAPL) at $2.951 trillion.

Market research firm Bespoke Investment said that MSFT has joined AAPL as the second individual company with a larger market cap than the companies that comprise the Russel 2000 index.

Now, let’s discuss the factors that could impact MSFT’s performance in the upcoming months:

Solid Financial Performance in the Last Reported Quarter

For the fiscal 2024 first quarter that ended September 30, 2023, MSFT reported revenue of $56.52 billion, beating analysts’ estimate of $54.55 billion. This compared to the revenue of $50.12 billion in the same quarter of 2022.

Microsoft’s Intelligent Cloud segment, which comprises Azure, public cloud, SQL Server, Visual Studio, Nuance, Windows Server, GitHub, and enterprise services, was up 19.4% year-over-year.

MSFT’s Productivity and Business Processes segment posted $18.59 billion, up 13% from the previous year’s period. This business unit comprises Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software. The software company’s gross margin grew 16% year-over-year to $40.22 billion.

In addition, the software maker’s operating income came in at $26.90 billion, an increase of 25% year-over-year. Its net income rose 27% year-over-year to $22.29 billion. MSFT posted an EPS of $2.99 versus the consensus estimate of $2.65. This was up 27.2% from the same period last year.

As of September 30, 2023, the company’s cash and cash equivalents stood at $80.45 billion, compared to $34.70 billion as of June 30, 2023. Its total current assets totaled $207.59 billion, compared to $184.26 billion as of June 30, 2023.

For the fiscal 2024 second quarter, Amy Hood, MSFT’s finance chief, expects the company’s revenue to come in the range of $60.40 billion to $61.40 billion, which implies approximately 15% year-over-year growth.

Robust Historical Growth

Over the past three years, MSFT’s revenue grew at a CAGR of 14.1%. Its EBITDA and net income improved at CAGRs of 16.7% and 17.5%, respectively, over the past three years. Also, the company’s EPS increased at a CAGR of 18.5%. Its levered free cash flow improved at 15.9% CAGR over the same timeframe.

Further, the company’s tangible book value and total assets increased at CAGRs of 25.7% and 14% over the same period, respectively.

Rebound In Cloud Spending

Revenue from Microsoft’s Azure cloud business surged 29% year-over-year during the September quarter, compared with 26% growth in the fourth quarter. Moreover, Microsoft is pulling ahead of its major competitors, Amazon.com, Inc. (AMZN) and Google parent Alphabet Inc. (GOOGL), in the race to recover from a two-year slowdown in cloud spending.

When multi-decade inflation hit last year, the Fed hiked interest rates, and companies responded by lowering their tech spending as a part of their cost-reduction measures. The inflation has fallen sharply from its peak of 9.1% hit in June last year. The Consumer Price Index (CPI), the most widely used measure of inflation, further showed signs of easing in October.

The core CPI, excluding volatile food and energy prices, increased 0.2% for the month and 4% year-over-year, lower than the estimates of 0.3% and 4.1%, respectively. Also, the annual level was the lowest in nearly two years and down from 4.1% in September. With declining inflationary pressures, organizations’ cost-cutting efforts have begun to wane, which should bode well for MSFT.

According to the latest forecast from Gartner, worldwide end-user spending on public cloud is projected to grow by 20.4% to a total of $678.80 billion in 2024, up from $563.60 billion in 2023. Growing business needs and emerging technologies like GenAI drive cloud model innovation.

MSFT is “still helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage,” CEO Satya Nadella said in the latest earnings release.

Significant Advancements in AI

MSFT has been making several initiatives to infuse generative AI into its software and services.

In January this year, Microsoft announced a multiyear, multibillion-dollar investment in ChatGPT-maker OpenAI. The agreement marked the third phase of the partnership between the two companies after MSFT’s prior investments in 2019 and 2021. The company is providing its Azure cloud computing infrastructure for OpenAI.

Also, Microsoft is adding OpenAI models to its consumer and enterprise software products.

In February, the company launched a new, AI-powered Bing search engine and Edge browser with built-in support for OpenAI’s ChatGPT. The new Bing search version could deliver better search, more accurate answers, a new chat experience, and the ability to generate content.

Further, on March 16, the software maker announced the addition of AI tools to its Office productivity applications and introduced a feature called Microsoft 365 Copilot. The Copilot feature uses next-gen AI to automate and simplify tasks and offer suggestions. MSFT announced that Microsoft 365 Copilot in Windows will be available on September 26.

Starting November 1, Microsoft 365 Copilot will be generally available for enterprise customers. In addition, this AI-powered Copilot is added to the company’s cybersecurity offerings and GitHub service for software developers.

On November 8, MSFT-owned GitHub introduced a Copilot assistant that can assist developers in working with their employers’ internal code, priced at $39 per person a month. The new launch might help the company boost revenue in its cloud business unit by taking enhanced advantage of partner OpenAI’s technology.

Recovery in the PC Market

MSFT reported a 4% growth in sales of Windows operating system licenses to device makers in the last reported quarter, putting an end to a streak of five quarters of year-over-year declines. Amy Hood stated that the PC market has started to stabilize.

As per the estimates from Gartner, worldwide PC shipments totaled 64.3 million units during the third quarter of 2023, a decline of 9% from the third quarter of 2022. A 9% decrease in the third quarter compared to a 30% decline in the first quarter.

After eight straight quarters of decline, the PC market is expected to begin recovery in the fourth quarter of this year. For 2024, Gartner projects the global PC market to witness 4.9% growth, driven by both the business and consumer segments.

“The good news for PC vendors is that the worst could be over by the end of 2023,” said Mikako Kitagawa, Director Analyst at Gartner. “The business PC market is ready for the next replacement cycle, driven by the Windows 11 upgrades. Consumer PC demand should also begin to recover as PCs purchased during the pandemic are entering the early stages of a refresh cycle.”

In September, MSFT introduced new Surface computers and revealed details about the release of this year’s version of Windows 11. The company unveiled the Surface Laptop Studio 2 and the Surface Laptop Go 3; both computers will have Microsoft’s revamped Windows 11 OS, which includes its Copilot software. The company could capitalize on the PC market’s expected recovery with these new launches.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue for the second quarter (ending December 2023) to grow 15.6% year-over-year to $60.96 billion. The consensus EPS estimate of $2.75 for the ongoing quarter indicates an 18.7% year-over-year rise. Moreover, the company has topped the consensus revenue in three of the trailing four quarters and EPS estimates in all the trailing four quarters.

Additionally, for the fiscal year (ending June 2024), Street expects MSFT’s revenue and EPS to increase 14.5% and 14.1% year-over-year to $242.69 billion and $11.19, respectively. Also, the software company’s revenue and EPS for the fiscal year 2025 are expected to increase 13.8% and 15.1% from the previous year to $276.22 billion and $12.88, respectively.

Bottom Line

Microsoft’s revenue and earnings beat analysts’ expectations in the last reported quarter, fueled by its cloud business strength, with Microsoft Cloud revenue up a staggering 24% year-over-year. Further, the software giant continues to make numerous advancements in AI, helping it regain tech leadership.

"With copilots, we are making the age of AI real for people and businesses everywhere," said Satya Nadella. “We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers,” he added.

According to Brent Thill, Jefferies analyst, the tailwinds of AI have begun to kick in for MSFT.

MSFT’s stock notched a new 52-week high in the previous trading session. The software maker’s early dominance in the realm of AI has been the primary driver of the stock’s impressive gains so far this year, and the stock is expected to surge higher in the upcoming months.

According to Bloomberg Intelligence (BI) research, the generative AI market could grow at a CAGR of 42% to reach $1.3 trillion by 2032.

Given MSFT’s solid financials, high profitability, and optimistic growth outlook, it could be wise to invest in this software stock now.

Is Altria Group (MO) a High-Yield Investor's Dream?

Posted on by The INO.com Team

Altria Group, Inc. (MO), one of the world's largest producers and marketers of tobacco, cigarettes, and related products, possesses virtues appealing to income-focused investors. The company's commitment to shareholder value is evidenced by 54 consecutive years of dividend payments, the latest of which marked its 58th increase, resulting in an impressive dividend yield of 9.72%. This, along with its low non-GAAP forward P/E of 8.14x, elevates MO into a secure and appealing investment proposition.

However, income investors are advised to be diligent, given the shift in the business landscape. Despite the company's significant presence, there has been a noticeable lag in capturing the interest of certain fractions of the financial community.

The health perils associated with smoking, ranging from Cancer to chronic obstructive pulmonary disease (COPD) such as emphysema, are no secret. Nicotine's addictive nature results in many to continue smoking despite understanding these risks.

Acknowledging this reality, MO is reinventing its offerings, transitioning toward smokeless tobacco products and electronic alternatives like vapes. This shift stems from changing perceptions and attitudes toward smoking, buoyed further by the mushrooming popularity of smoking alternatives.

While venturing into vaping, MO must redouble its efforts to win significant market share. It could secure its future by matching its dominance in the traditional cigarette market within the e-cigarette industry.

Despite commanding a substantial 42.3% market share and 58.9% share in the premium segment, there are mounting concerns about the long-term ability of MO to sustain its dividend payments. This is due to the rising unpopularity of cigarettes amid health concerns.

The Richmond-Virginia-based tobacco company’s robust economic foothold is widely acknowledged. However, a slump in performance since its peak in mid-2017 has led to speculation that its glory days might be behind it. The company's recent third-quarter results substantiate these market apprehensions.

In the fiscal third quarter (ended September 30, 2023), total smokeable products volume declined 11.4% year-over-year as demand for its core cigarette business dwindled, exacerbated by the influx of illicit e-vapor products. This downturn began amid the COVID-19 pandemic and has been eating into product volumes ever since.

Its revenue for the quarter declined 2.5% year-over-year. However, MO has so far managed by consistently raising cigarette prices for a shrinking customer base, which allowed it to maintain revenue acceptable for its dividend payout, thus attracting income-oriented investors.

This year, MO has so far accrued pre-tax charges amounting to $424 million for tobacco litigation, including the settlement of JUUL-related litigation. In May, MO settled an estimated 6,000 lawsuits accusing it of exacerbating the teen vaping epidemic through its prior investment in JUUL.

In addition to falling short of Wall Street’s expectations for the third quarter of 2023, the company narrowed the current fiscal year’s adjusted EPS outlook. The company expects the adjusted EPS between $4.91 and $4.98, or a growth rate of 1.5% to 3%, down from the prior forecast of between $4.89 and $5.03, or a growth rate of 1% to 4%.

MO’s shares have dipped slightly after an underwhelming third-quarter performance and a narrowed 2023 earnings outlook. It has lost over 10% year-to-date.

Bottom Line

MO faces significant macroeconomic challenges, competition from illegal merchants and manufacturers contesting NJOY, and a substantial decline in legacy tobacco product sales.

Cigarettes constitute approximately 90% of MO's gross revenue. The firm is grappling with the consequences of its exclusive reliance on a single-market strategy. July’s Gallup poll indicates declining smoking rates in the U.S. as cigarette use drops. There is a growing concern that demographic trends might inevitably usher the company's revenue into decline.

Moreover, considering its poor fundamentals in the last reported quarter, a segment of the investment community may be suitable to assume higher execution risks, which perhaps the company's modest valuation may not have fully considered.

Its solid dividend yield compares with the S&P Index's 1.5% yield and other reliable income alternatives. Apprehensions persist, however, regarding the company's capacity to offset volume dips with long-term price hikes. Investor unease persists about the feasibility of the projected mid-single adjusted EPS growth outlook through 2028.

Along with MO's appealing valuation and high dividend yield, investors must consider the factors discussed in this article before investing in the stock.  

4 Stocks to Buy Before Black Friday 2023

Posted on by The INO.com Team

Black Friday, a renowned shopping holiday, is rapidly gaining popularity worldwide. The fervor surfaces like clockwork every year. The event signals the onset of the festive retail period, where vendors entice consumers with considerable discounts and appealing deals on merchandise.

Consumers’ scramble for long-desired products is typically the culmination of months of intense preparation undertaken by retailers, warehouse supervisors, and distribution center managers.

Financial analysts conventionally consider the sales returns on Black Friday to outline prevailing consumer confidence. For retail entities, Black Friday has consistently offered an immense financial uplift. Many consumers leverage the occasion to fulfill their Christmas shopping needs at competitive prices.

With persistent escalations in living costs pressurizing household budgets, 74% of consumers intend to exploit the November sales extravaganza in 2023. The National Retail Federation forecasts that holiday spending will increase annually by 3% to 4%. This year's total festive spending is anticipated to range between $957.3 billion and $966.6 billion.

Black Friday is transitioning from physical store-bound activity to being predominantly digital. In 2022, 69% of Black Friday shopping occurred online, as consumers splurged a record-breaking $9.2 billion, according to data from Adobe Analytics. Furthermore, logistical operations for this retail marathon require meticulous strategizing by retail managers, leading to millions in annual outlay.

As digital transactions encroach on the week-long event, it carries notable implications for delivery logistics. Notably, while retailers profit from the holiday season, package delivery services also stand to reap considerable benefits.

Considering this backdrop, it is pertinent to examine why United Parcel Service, Inc. (UPS), FedEx Corporation (FDX), eBay Inc. (EBAY), and Best Buy Co., Inc. (BBY) could be solid investments this festive season.

United Parcel Service, Inc. (UPS)

With a market cap of over $121 billion, UPS is a logistics behemoth that offers various integrated solutions for customers scattered across more than 200 locations worldwide.

Despite its significant standing, the company has been grappling with an assortment of challenges throughout this year. These range from a weakening demand due to economic slowdown to expensive, drawn-out labor contract negotiations, all translating into a forecasted decline in the company’s revenue and earnings for the current fiscal year.

The protracted labor talks significantly distorted UPS' earnings during the year. The resulting five-year contract led to a whopping $500 million upfront expenses in the third quarter alone. At the same time, the extended negotiations caused many customers to switch their deliveries to other networks.

However, opportunities abound as the Black Friday holiday season approaches for UPS to turn the tide. This retail extravaganza provides ample scope for UPS to augment its revenue, attract fresh clientele, and retain its existing customer base, courtesy of its high-quality service offerings.

UPS is improving the underlying quality of its business. This is most easily seen in two areas relating to its revenue. The first is the conscious decision to be more selective over deliveries rather than chasing volume growth. Second is that UPS has made great strides in expanding its connections with small and medium-sized businesses (SMB) and healthcare customers, and it's been able to significantly grow its revenue per piece in recent years.

Moreover, the company's noteworthy 4.7% dividend yield appeals to a broad swathe of income-oriented investors, and value investors also find favor given its appealing valuation metrics. The firm's below-industry non-GAAP P/E ratio presents a lucrative buying opportunity for investors.

Over the past year, the stock has lost roughly 20% and trails behind the 50, 100, and 200-day moving averages. However, Wall Street analysts forecast the stock to reach $168.30 in the next 12 months, indicating a potential upside of 17.6%. The price target ranges from a low of $100 to a high of $202.

FedEx Corporation (FDX)

The shipping and logistics company FDX, with a market cap of over $63 billion, is poised to reap significant benefits from the upcoming Black Friday sales. In anticipation of heightened online shopping activity during this period, increased demand for shipping services allows the company to expand its customer reach and deepen its market penetration.

Its potential to attract consumers by offering holiday promotional discounts on its services could significantly drive its revenue growth and expand its market share. The company's decision to partner with retailers for shipping services further bolsters the potential for enhanced revenues during this season of heightened consumer spending.

Additional services provided by FDX, including gift wrapping, package tracking and insurance, could further distinguish it in a competitive marketplace, attracting additional consumers during the holiday season.

Furthermore, FDX's effective cost-reduction strategies have successfully strengthened its financial standing. Outperforming Wall Street predictions, the international courier company reported impressive fiscal first-quarter adjusted earnings of $4.55 per share.

This robust financial performance led the company's management to elevate its future financial outlook. FDX shares gained momentum after the Memphis-based firm announced adjusted earnings expectations for fiscal 2024, projecting $17 to $18.50 per share.

The company also expects capital expenditure to reach $5.7 billion, with investment priorities geared towards improving efficiency through fleet and facility modernization, network optimization, and automation strategies.

Driven to implement transformative initiatives enhancing efficiency and reducing expenses, FDX anticipates building upon current momentum to improve profit margins and returns throughout the fiscal year. The stage is set for another year of exceptional profitability for FDX, with shares currently trading at a reasonable valuation.

Over the past year, the stock has gained roughly 45% and trades above the 200-day moving average of $237.12. However, Wall Street analysts forecast the stock to reach $297.85 in the next 12 months, indicating a potential upside of 17.2%. The price target ranges from a low of $265 to a high of $330.

eBay Inc. (EBAY)

With over $20 billion in market cap, EBAY, an established e-commerce heavyweight, is tirelessly striving to attract its consumers' interest and spending power. The company initiated the publication of its discount coupons on November 6.

Customers seeking automotive necessities, smartwatches, and Apple products can reap the benefits of up to 75% discount by commencing their shopping endeavors with EBAY this holiday season.

The company recently expanded access to its Generative AI technology, an innovative system designed to upgrade the listing experience for sellers, which is now available to mobile users in the United States, the United Kingdom, and Germany, and 50% of desktop users in these regions.

However, EBAY's recent sales forecast for the upcoming holiday period has somewhat dispirited investors. Expected revenues for the current quarter are anticipated to total between $2.47 billion and $2.53 billion, which, while robust, fall below the industry analysts' average projections of $2.60 billion.

Its bleak revenue predictions for the historically lucrative holiday quarter indicate continued difficulties in retaining customers amid fierce competition from larger competitors. Despite U.S. online sales being projected to increase by 4.8% during the holiday season spanning November 1 to December 31, EBAY faces an uphill battle to attract traffic. To weather these challenges, the company plans to enhance its cost efficiencies to safeguard profit margins and earnings.

The unexpected forecast emanated shockwaves throughout the financial sector, particularly unsettling EBAY investors. Post-announcement, the company's shares suffered a significant plunge, underscoring the heavy expectations investors attach to EBAY due to its commanding position in the e-commerce market.

Over the past year, the stock has lost over 12% and trades below its 50-, 100-, and 200-day moving averages. However, Wall Street analysts forecast the stock to reach $44.75 in the next 12 months, indicating a potential upside of 11.6%. The price target ranges from a low of $32 to a high of $56.

EBAY constantly refines its strategies to uphold its preeminence in an industry characterized by relentless evolution and revolution. As the holiday season looms, its performance is under intense scrutiny as never before, making its sales forecast a widely watched indicator in the e-commerce landscape.

Best Buy Co., Inc. (BBY)

BBY, with over $14 billion market cap, is a specialty consumer electronics retailer that introduces various promotional events via its recently inaugurated Holiday Gift Center – offering unique exploration and immersive discovery experiences of cutting-edge technologies for its clientele. BBY members can anticipate exclusive savings throughout the holiday period. The company will depend on its My Best Buy membership benefits to boost this year's holiday sales.

Interestingly, BBY finds itself in a unique situation this festive season as it battles to maintain market share during a time frame it typically dominates. The retailer has tempered expectations for a highly successful holiday season, which usually accounts for a significant proportion of its profit margins.

While BBY has a low non-GAAP P/E of 10.30x, its dividend yield of 5.74% remains low for various reasons. As of July 29, 2023, BBY has $8.43 billion in current liabilities and $8.30 billion in current assets. Of its current assets, $5.65 billion in merchandise inventories highly depends on consumer spending patterns.

The company’s vulnerability can be illustrated further by its lower than 1x current ratio. Given the upcoming debt maturity, the company’s fortunes largely hang on the successful sale of inventory to maintain its dividend.

This year’s holiday season provides a moment for BBY's modern retail business model – which largely thrived during the pandemic – to prove its resilience. The Richfield, Minnesota-based firm continues to concentrate on enhancing its digital capabilities, such as augmenting its omnichannel services. Its consultation service, supporting customers' personalized tech requirements, has grown in popularity.

In the second quarter that ended July 29, 2023, digital sales comprised 31% of our domestic revenue, consistent with the year-ago quarter and nearly twice as high as the domestic revenue percentage in the pre-pandemic second quarter of fiscal 2020.

Although the BBY stock has declined over 10% over the past year and is trading beneath the 100-day and 200-day moving averages, Wall Street analysts remain optimistic. They forecast the stock to reach $78.60 in the next 12 months, indicating a potential upside of 18.2%. The price target ranges from a low of $60 to a high of $110.

Even though it is perceived as a risky stock with slim margins and limited appeal to investors, BBY is determined to convince potential investors that its forward-looking strategies, industry reshaping efforts, and focus on advancing in-store experiences and robust pickup/delivery operations mark it as a worthwhile investment prospect. Hence, it could be best added to the watchlist.