Month: May 2018

TJX beat on revenue and EPS with better than expected SSS. Performance was solid across divisions and concerns around inventory availability were dispelled. SSS were +3% vs guidance of +1-2% with strong performance across their apparel and home categories. Traffic was the primary driver across all 4 divisions. Marmaxx division (60% of revenue) SSS were +4% driven mostly by traffic and slightly by ticket. International SSS were +1% despite a “challenging retail environment” in Europe (where they have over 500 stores). Full year guidance is 1-2% SSS (in their 40+ yr. history they’ve had only 1 year of negative SSS). They also mentioned they “have been disproportionately attracting new millennial and Gen Z customers.” Merchandise margins compressed a little, but gross margins were flat. They are seeing some headwinds from wages and “significantly higher” freight costs, offset by positive Fx and a lower tax rate. The midpoint of full year guidance was raised despite these headwinds and with a lower expected tax benefit. Full year EPS should be about $4.07 plus a $0.72 benefit from a lower tax rate.

Continue reading “TJX 1Q19 Earnings Update”

Thesis intact, key takeaways:

Cisco reported Q3 earnings and beat on the top and bottom line and guided in line with street. While the quarter was strong, the growth of Services revenue (26% of revs) seemed to be a little lower than expected and gross margins were lower. They had 70 bps of gross margin compression driven almost entirely by higher memory costs. This is similar to previous quarters and is an industry wide phenomenon. They continue to make good progress on their transformation from a hardware business to a software and services focused business. The percentage of recurring revenue is now at 32% – they set a goal of 37% by 2020. Enterprise saw accelerated growth at +11% YoY driven by strong growth with Catalyst 9k units –the 9k switches are only sold with a subscription and are a key part their strategy of shifting their core business to recurring revenue. They saw strength in both campus and data center switching. Additionally, Applications and Security were both strong – up +19% and 11% respectively. As expected, Service Provider revenue trends continue to be weak, pressuring router sales – though exposure to this end market is decreasing. They repurchased $6.2bn worth of shares in Q3 and still have $25B remaining in their buyback authorization which they aim to complete in 1.5-2yrs.

Valuation:

· They have 3% dividend yield which is easily covered by their FCF.

· FCF yield of over 6.5% is well above sector average and is supported by an increasingly stable recurring revenue business model and rising FCF margins.

· The company trades on hardware multiple, but the multiple should expand as they keep evolving to a software, recurring revenue model. Hardware trades on a lower multiple because it is lower margin, more cyclical and more capital intensive.

Thesis on Cisco

· Industry leader in strong secular growth markets: video usage, virtualization and internet traffic.

· Significant net cash position and strong cash generation provide substantial resources for CSCO to develop and/or acquire new technology in high-growth markets and also return capital to shareholders.

· Cisco has taken significant steps to restructure the business which has helped reaccelerate growth and stabilize margins.

$CSCO.US

[tag CSCO]

Sarah Kanwal

Equity Analyst, Director

Direct: 617.226.0022

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square, Suite 500

Boston, MA 02109

www.crestwoodadvisors.com

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Current Price: $2,045 Price Target: $2,400

Position Size: 3% TTM Performance: 20%

Bookings reported a better top and bottom line but guidance disappointed. Total bookings for the quarter increased 21% to $25B (+12% constant currency). The source of the disappointing 2Q guidance is expectations of decelerating room night growth (+7-11% vs +13% in 1Q) caused by a reduction in performance advertising spend. Performance ad spending is primarily with Google and to a lesser extent with sites like TripAdvisor and Trivago. They are making a deliberate trade-off in reducing costlier (and fading ROI) performance ad spend, despite the impact to room night growth. The benefit is hitting margins and was the cause of the big EPS beat. This strategy is not new – rising advertising costs have been a theme across the industry and their response is consistent with what they have said the last couple quarters and is not a surprise. They are shifting ad dollars to brand advertising (like TV) in an attempt to get more direct traffic to their site as the ROI on performance advertising has gone down and as a result direct traffic is increasing as a % of the mix. After last quarter, many speculated that this may disrupt room night growth – which it has. The long-term thesis, however, is intact and they still have plenty of runway for growth.

Continue reading “Booking Holdings 1Q Earnings Update”

Aramark reported 2Q18 earnings, beating on the top and bottom line and raising the midpoint of EPS guidance. Revenue was up 6% constant currency with about 2% organic growth. The quarter included partial results from AmeriPride and a full quarter of Avendra. The key positive was the improvement in adjusted operating margins in conjunction with top line growth as the two together have been elusive. Importantly, the margin expansion was led by their core US food service business in contrast to their competitor Sodexo’s profit warning on inflation and increased competition. Sentiment was bad heading into the quarter as Aramark has had trouble hitting their organic growth and margin targets. In 2017, they disappointed with organic growth, but saw margin expansion. Then last quarter they saw meaningfully improved top line growth at the expense of 50bps in margin contraction. This was largely blamed on the onboarding of new contract wins. Management says they are on track to hit the FY18 7.2% margin target that they set in 2015, though with much of it back half weighted (implies a 7.9% adj. op. margin in 2H18 vs 6.5% in 1H18). Legacy growth was slightly below long-term target for 1Q, but they said they expect the legacy business to hit their “at least 3%” target for the full year. For 1H18 they are at 3.4%. Without adjustments, their operating profit would have been down almost 30%. Some of their adjustments and the capitalization of certain client related costs are a source of skepticism around the validity of their margins. This margin concern has been reinforced by profit issues at Sodexo and talk of rising delivery costs from their primary distributor, Sysco. Specifically, client contract incentives represent cash payments for renovations of client facilities – this hits the capex line and is in “other assets” on the balance sheet (net of accumulated amortization it’s close to $1B). Adj. operating income adds back that depreciation and, in doing so, added 80bps to the 2Q adj. operating margin. Longer term, their acquisitions will help with margins through increased purchasing scale with Avendra and better capacity utilization and route density with AmeriPride.

Continue reading “Aramark 2Q18 Earnings Update”