Thursday's Headlines: Inflation Bites Target Hard
Here were the biggest movers in the MyWallSt shortlist yesterday:
Moving Up ⬆️
FactSet (FDS) +2.0%
Casey's (CASY) +1.8%
Diageo (DEO) +1.1%
Monster Energy (MNST) +1.1%
The Home Depot (HD) +1.0%
Moving Down ⬇️
2U (TWOU) -9.5%
Stitch Fix (SFIX) -9.4%
Atlassian (TEAM) -8.4%
StoneCo (STNE) -8.1%
Nordstrom (JWN) -8.0%
Here are the stories that you need to know ahead of market-open today, Thursday the 17th of October.
Inflation Bites Target Hard 🛒
Just when we thought in-person retail had gotten its act together, Target delivered a disastrous earnings report on Wednesday. For the third quarter, the famed retailer had revenue of $26.52 billion vs. $26.38 billion expected and earnings per share of $1.54 vs. $2.13 anticipated. The company’s profit fell by 50% from the same quarter last year and this drastic change was all down to excess inventory and the significant discounting needed to get rid of it.
This means Target will miss its updated operating margin goal for the back half of the year that it set last quarter during its second guidance revision. It promised an operating margin of around 6% but this quarter it only managed to deliver 3.9%.
According to management, inflation is taking a toll on consumer spending habits. Discretionary spending is on the decline while shoppers also opt for lower-priced groceries and necessities. Interestingly, the retailer also reported a 50% increase in shoplifting with an estimated $400 million in inventory lost so far this year.
Looking forward to the holiday season, Target had a rather pessimistic outlook with consumer shopping habits unclear. Target Chief Growth Officer Christina Hennington said customers’ “price sensitivity intensified during the last two weeks of October” and this trend seems to be continuing through the beginning of November.
Target expects a low single-digit decline in comparable sales and an operating margin rate of around 3% for Q4.
Target’s stock fell more than 14% on the news.
Nvidia Holds Steady Despite Sliding Revenue 🕹
Shares in Nvidia have remained relatively stable following its third-quarter earnings report yesterday — something of an anomaly for tech stocks in recent times. The Santa Clara-based technology firm finished yesterday down over 4% but has regained more than 2% of that loss premarket today so far.
Nvidia posted adjusted earnings per share of $0.58 against an expected $0.69, while revenue came in at $5.93 billion versus an anticipated $5.77 billion. Despite this revenue beat, that figure marks a 17% underperformance compared to the year-ago quarter — something shareholders are likely to be at least slightly concerned about. President and CEO Jensen Huang stated:
“We are quickly adapting to the macro environment, correcting inventory levels and paving the way for new products.”
The company’s gaming division reported sales of $1.57 billion, down over 51% from the year-ago period as the PC gaming market continues to slow following the rapid expansion seen during pandemic-induced lockdowns. Retailers have a surplus of inventory and are therefore slashing orders.
One bright spot for Nvidia was the performance of its data center segment which grew by more than 31% year-over-year following increased sales to cloud service providers in the United States.
Nvidia is currently down just over 47% year-to-date and is contending with a myriad of issues, including the U.S. government’s decision to invoke export controls on the type of chip that can be exported to China as the battle for tech supremacy between the two superpowers heats up. While Nvidia was quick to pivot to develop a chip that met export guidelines, it's just the latest in a long line of issues that continue to plague the industry at large in recent months.
dLocal Down 51% After Short Report 🤯
Shares of dLocal fell 51% yesterday after famed short seller Muddy Waters Research released a report attacking the company. The piece opened with the quote:
“While we have found no pictures of its CEO wearing black turtlenecks, our research leads us to believe that DLO is likely a fraud. We also have concerns over its disclosures about, and controls of, client funds.”
It would accuse the company of “cooked books”, with discrepancies and contradictions amongst its total payment volume (TPV) and accounts receivable figures, as well as bringing into question the flow of funds from its acquisition of PrimeiroPay in 2021, and an insider option exercise. Muddy Waters is “highly skeptical” of the company’s take rates too which predominantly derive from foreign exchange (FX) gains and fees. It has accused the company of overstating its FX gains by “roughly double – if not close to triple – what they should be.”
Other accusations include the potential misappropriation of client funds to pay a dividend, poor governance, questionable auditors, and an executive team that was quick to offload shares after going public.
The Uruguay-based payments platform, which facilitates payment flow to emerging markets, was quick to talk down the accusations with a short statement:
“The report contains numerous inaccurate statements, groundless claims and speculation. Short seller reports are often designed to drive the stock price downwards to serve the short seller’s interests to the detriment of the company’s shareholders.”
Investors will be looking for a strong response from dLocal if it is to salvage its reputation. While short reports are speculative in nature, it would be very surprising to see a firm like Muddy Waters throw such grave accusations out there unfounded.