It’s that time of the quarter, earnings season! After a typical slow, uneventful early August, stocks are back to reporting in full swing and the market has reacted to what it saw thus far. In this discussion, I will highlight some winners and losers within the consumer discretionary earnings season.
Winners
Walmart (WMT)
If you remember, back at the end of February, WMT completed a 3-for-1 stock split. After this strategic, on-brand decision, WMT continued its positive outlook by reporting earnings in the green. On top of record-high inflation, the U.S. jobs report this month showed an economic slowdown. For July, fewer jobs were created than expected in addition to an increase in the unemployment rate. Furthermore, a dramatic reduction of the trailing year’s job gains by 818,000 further adds to recession worries. In turn, this spurred the substitution effect, where inferior goods are substituted for higher-quality goods. Consumers are looking to get the most bang for their buck, and WMT – a one-stop shop – is where they are looking. Not to mention, WMT’s successful Walmart+ program which continues to grow year-over-year. Consumers are also turning to house-made, generic brands like WMT’s ‘Great Value’ to keep their wallets thicker.
Cava Group Inc. (CAVA)
If you have not yet heard of Cava, or eaten there yet, you soon will. CAVA, a Chipotle Mexican Grill (CMG)-like Mediterranean fast-casual restaurant is on the move. With exceptional room for growth and a similar experience to CMG, CAVA offers a different taste and cultural experience than its competitors, but with a similar dining experience. With just 341 restaurants currently around the country, CAVA has room for expansion across the states. They have retained a 22% year-over-year store increase, with 18 new stores added in the second quarter. Albeit small, the company has an appetite for big expansion over the next decade. Revenue reported a growth of 35.2% to $231.4 million as compared to the prior year’s second quarter of $171.1 million. Additionally, CAVA reported a 26.5% profit margin, an increase from the previous quarter.
What does this mean? This shows CAVA has the right business model and growth strategy that may prove to be sustainable in the future. With an accelerated rate of revenue and profit margin, slow and steady wins the race when it comes to expansion. In anticipation of their second quarter earnings, LVAM took a bite out of CAVA and likes the way it tastes. As a stock, CAVA reminds us of the growth trajectory that CMG enjoyed:
Historical chart of CMG. | Souce: Telemet
The TJX Companies Inc. (TJX)
TJX operates off priced apparel and home goods featuring TJ Maxx, Marshalls, and Home Goods brands, among others. TJX stores are value brands that bring fashionable, brand-name, designer merchandise to you at a lower, more affordable cost. According to the company, their merchandise is generally 20%-60% less than full-price retailers. Like WMT, TJX offers consumers a more affordable way to consume nicer, high-end products for their everyday enjoyment. As the consumer is hurt with inflationary prices across the board, they are looking to save anywhere they can, and their home or wardrobe is no exception.
Entirely driven by customer transactions, the company reported a 4% comparable store sales increase with a 10.9% pretax profit margin. The company reported a $982 million return to shareholders through repurchases and dividends. Given the second quarter results, TJX increased its outlook for fiscal year 2025.
Losers
Amazon.com Inc. (AMZN)
AMZN was not looking so hot after their recent quarterly results, missing analyst expectations for Q2. After years of cost-cutting, AMZN has switched up its strategy to be more focused on spending. Right now, it is prioritizing its AI spending over all else, not something shareholders are excited to hear. Our hope is that this spending pays off in the future to make AMZN a more ambitious tech stock compared to its competitors.
Furthermore, we must ask the question as to whether the Walmart+ program is taking a bite out of AMZN's playbook?
Chipotle Mexican Grill Inc. (CMG)
Once a great growth stock, CMG has seen better days (see chart above). With a recent internal shakeup to its c-suite, the company is in the middle of a transition that will soon have to prove itself again with new directors. In addition to its internal development and uncertainty, CMG has faced some bad press recently that it has been working to remediate. This includes a stream of social media videos unleashing complaints regarding CMG’s portion sizes (shrinkflation, would you say?), in which CMG admitted stores needed retraining to ensure portion sizes were up to standards. While a much larger business than CAVA, CMG has a reputation that continues to drive consumers into stores, but not as fast a pace as previously reported. We sold off CMG not long after its peak but are prepared to reenter once the stock stabilizes and the company rights its ship.
Ford Motor Company (F)
In a recent announcement, Ford began pulling back on EV production due to low demand. The company will redirect its emphasis on hybrids. Concurrently, the company took a special non-cash charge of about $400 million plus additional related expenses possibly rising up to $1.5 billion. Compared to Tesla (TSLA), Ford has little going for it besides its Pickup truck productions. TSLA on the other hand, has various other industry factors like their technology and AI businesses. Ford is down almost 10% YTD. In Ford's most recent earnings call, they reported a 30% decrease in EPS.
While this is not a finite list of winners and losers, it is quite clear we will keep our eyes on the stocks listed above. As consumers are fighting “shrinkflation” and becoming more frugal, it is imperative we consider following these value companies to see how they progress through this economic time.
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Disclosure: At the time of this commentary Carly Rothbort, her family and/or clients of LakeView Asset Management, LLC was long WMT, CAVA, TJX, and AMZN - although positions can change at any time. The mention of stocks are not recommendations and may not be suitable investments for your individual situations.
Carly Rothbort is the Vice President at LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high-net-worth private wealth management. LVAM is a separate entity of Osaic Advisory Services, LLC, a registered investment advisor.
For more information on investing with LakeView Asset Management, LLC call us at 702-749-9343 or request more information by clicking on the contact button on the top right-hand corner of the website or by emailing Scott at scott@lakeviewasset.com or Carly at carly@lakeviewasset.com. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ.
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