Everything But The Kitchen Sink

No doubt, it has been a tough go of it for corporations and their stock prices this year. Higher interest rates and fears of recession have led folks to bail on stocks no matter their valuations. Market participants have decided that the proverbial glass is half empty, no matter if companies have met or exceeded expectations.

And those that have turned in below-par results or issued weak guidance have seen their stocks taken out to the woodshed for a beating. Not surprisingly, perhaps, some of those that disappointed traders added extra lemons to the mix in hopes of making better-tasting lemonade down the road.

Indeed, some companies threw as much bad news as they could into their announcements, understanding that long-term-oriented investors would rather take greater near-term lumps today in exchange for much easier comparisons tomorrow.

Nothing wrong with this, as I am not investing for short-term gains. Also, as I think has been the case with two terrific long-term opportunities, the lowering of the bar can be beneficial when a new leader has taken the helm.

WEANING OFF OF THE SWOOSH

Shares of Foot Locker (FL) plunged 30% the day it released Q2 financial results back in February. This was despite growing EPS 8% year-over-year and beating consensus analyst projections by 12%. All it took was for the athletic footwear retailer to mention that a shift by its largest supplier, Nike, increasingly toward direct-to-consumer (DTC) sales had affected results.

Of course, sales of Nike inventory had already been declining for some time, representing 75% of total purchases in 2020 and 70% in 2021. Now with the benefit of hindsight, we could argue that then-CEO Richard Johnson was prepping a fresh start for current CEO Mary Dillon, whose hire gave the stock a nice boost when announced in August.

Mr. Johnson is certainly aware of the Street’s sensitivity to Foot Locker’s exposure to Nike, even as the company has continued to further diversify its vendor mix and add its own DTC capabilities in recent years. And Foot Locker was not alone in having to wrestle with inventory challenges that have plagued much of the apparel industry.

Big things are expected from Ms. Dillon, who as CEO of Ulta BeautyULTA
grew the makeup chain’s revenue more than 12% per year on average, propelling that company’s stock to more than triple in price over her tenure.

Helping to cushion the fall in its stock price, Foot Locker also announced in February that its Board approved a 33% increase in its quarterly dividend. The payout rose from $0.30 to $0.40 per share, pushing the present yield to close to 5%. The company also authorized a new share repurchase program of $1.2 billion.

Not bad for a stock trading at a single-digit earnings multiple, with market capitalization of just $3 billion.

DOWN BUT NOT OUT FOR THE DELIVERY TITAN

A similar story may be brewing at FedEx (FDX), who earlier this year promoted Raj Subramaniam to take the CEO slot from founder and chairman Fred Smith.

FedEx, like most global industrials, has suffered from elevated fuel prices and margin pressures for much of 2022. However, the mood really soured in mid-September when Mr. Subramaniam said, “Global volumes declined as macroeconomic trends significantly worsened later in the [first fiscal] quarter, both internationally and in the U.S. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first quarter results are below our expectations.”

As an economic bellwether this announcement of “significantly worsening” macro trends not only caused FDX to plunge more than 20% in a single day but sent ripples through stock markets around the world. It was just in April that the FedEx board announced a 53% increase to the dividend (the yield is now 3%). The company was faced with ramping capacity to handle rapidly increasing demand throughout the pandemic as a spike in e-commerce boosted residential deliveries.

Now, rationalizing demand offers an opportune moment to reset the bar lower for the new CEO, and ought to make favorable the comparable quarters to come. This time always feels different, but it is unlikely a recession in the U.S. and/or Europe would serve FDX any sort of death knell given that the company has weathered a variety of economic storms since it first started hauling packages in 1971.

With everything but the kitchen sink apparently having been thrown at the stock this year, I think there is plenty of upside for investors able to extend their time horizon beyond the next few quarters.