Author: Adam Levine-Weinberg

KSS – Kohl's Crushes Q2 Earnings Estimates

Written by Adam Levine-Weinberg on . Posted in KSS, Stock Report.

Department stores have reported surprisingly strong second-quarter results this month. Pent-up demand has enabled many companies in the perennially challenged sector to surpass their 2019 sales volumes in recent months. Moreover, department stores are capitalizing on tight inventory across the retail industry to cut back on discounting, boosting gross margin.

On Thursday, Kohl’s (NYSE:KSS) became the latest department store chain to reveal a big earnings beat for the second quarter. Let’s take a look.

Completing the sales recovery

At the beginning of the COVID-19 pandemic last year, Kohl’s top line plunged by more than 40%, as it was forced to shutter its stores temporarily. The company’s sales trajectory steadily improved over the course of 2020, though. By the fourth quarter, sales were down a comparatively modest 10.1% year over year. Kohl’s made further progress in the first quarter of fiscal 2021, reporting total revenue of $3.89 billion — down just 4.9% compared to Q1 2019.

Last quarter, Kohl’s completed its journey back to pre-pandemic sales levels. Total revenue reached $4.45 billion on net sales of $4.22 billion, up more than 30% year over year. In the second quarter of fiscal 2019, the department store giant posted revenue of $4.43 billion on net sales of $4.17 billion.

The exterior of a Kohl's store with a Sephora shop inside.

Image source: Kohl’s.

Generating slightly more revenue compared to two years ago represented an important step in Kohl’s recovery. That said, U.S. retail sales have exceeded 2019 levels by nearly 20% over the past few months. Sure enough, many of Kohl’s rivals posted stronger sales results last quarter.

Profitability and cash flow surge

While Kohl’s top-line results were nothing to write home about, you couldn’t say the same thing about its earnings. Gross margin surged to 42.5% from 33.1% a year ago and 38.8% in the second quarter of fiscal 2019, as Kohl’s cut back on promotions in light of industry conditions. Meanwhile, the retailer held operating expenses below 2019 levels.

This drove explosive earnings growth. Kohl’s operating margin reached a 10-year high of 12.8% last quarter. Earnings per share (EPS) surged to a second-quarter record of $2.48, more than twice the analyst consensus of $1.16. For comparison, Kohl’s recorded second-quarter EPS of $1.51 in fiscal 2019. And at the beginning of fiscal 2021, management projected that the company’s EPS for the entire year would land between $2.45 and $2.95.

The strong bottom-line performance helped Kohl’s generate an incredible $1.25 billion of free cash flow last quarter. That in turn enabled it to repurchase $255 million of stock while still ending the period with more cash than debt on its balance sheet.

A display for Levi's jeans and other apparel in a Kohl's store.

Image source: Kohl’s.

In light of its huge Q2 earnings beat, management raised its full-year guidance for the second time this year. Kohl’s now expects to generate record adjusted EPS between $5.80 and $6.10, compared to its prior forecast range of $3.80 and $4.20.

Don’t worry about lagging sales

Based on the company’s latest guidance, Kohl’s stock trades for less than 10 times earnings. That’s a bargain price if the company can grow its earnings over time, especially given its strong balance sheet.

The only red flag in Kohl’s second-quarter earnings report was that revenue growth relative to 2019 substantially trailed the broader retail industry. However, inventory shortages probably contributed significantly to this underperformance. While most retailers have faced supply chain challenges this year due to pandemic-related factory closures and port congestion, Kohl’s appears to have fared particularly poorly. It ended the second quarter with inventory down 25% from two years ago.

Additionally, Kohl’s just began the rollout of its extremely promising partnership with beauty retailer Sephora. This initiative should drive a substantial amount of incremental revenue growth as the rollout continues over the next few years. The company also continues to add other powerful brands to its merchandise mix, such as Tommy Hilfiger and Eddie Bauer.

As a result, Kohl’s is poised to continue driving sales and earnings to new heights in the years ahead. That makes Kohl’s stock an enticing bargain for long-term investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

BA – Chaos Continues at Boeing

Written by Adam Levine-Weinberg on . Posted in BA, Stock Report.

Last November, the FAA finally lifted the grounding order for Boeing‘s (NYSE:BA) 737 MAX after 20 months. That allowed the aerospace giant to resume deliveries of its top-selling model before year-end.

Long-suffering Boeing shareholders hoped that this milestone marked the end of an unfortunate but isolated episode. Unfortunately, new problems have continued to crop up across the enterprise in 2021, further eroding management’s credibility. Until Boeing improves its execution, investors should probably continue to steer clear of the company.

Wide-body jet programs in shambles

While 737 MAX deliveries have now resumed, Boeing’s wide-body aircraft families have emerged as new weak spots in its product lineup. Production of the 747 jumbo jet will end next year. Boeing has slashed output of its next-largest model — the 777 — to just two per month. Most of those are freighters, as demand for the passenger variants has virtually disappeared.

The next-generation 777X was supposed to revive demand for large passenger jets. However, while the first delivery was originally scheduled for 2020, it was delayed to late 2023 earlier this year. Even hitting that target may be impossible. The FAA recently slowed the certification process, as Boeing has not fully addressed problems uncovered in early flight tests last December. And nearly eight years after officially launching the 777X program, Boeing has just eight confirmed customers for the type.

A rendering of a Boeing 777-9 flying over clouds.

Image source: Boeing.

Meanwhile, the 787 Dreamliner has experienced a series of production miscues. Boeing has periodically identified new manufacturing flaws over the past year, forcing it to halt deliveries again and again. It delivered just two 787s in the first quarter, and after starting to get back on track in April, it had to halt deliveries again in May. The industrial giant has slashed 787 production as it tries to get a handle on its quality-control problems.

Ironically, the venerable 767 has been the steadiest performer of Boeing’s wide-body models in 2021. However, new emissions rules will likely force Boeing to stop building commercial variants of the 767 by 2028.

Another setback for the space program

Unfortunately, Boeing’s commercial jet business isn’t the only part of the company struggling with major execution problems. Earlier this month, Boeing had to cancel its planned Starliner uncrewed test flight to the International Space Station, after 13 valves in the propulsion system failed to open on command.

The Starliner’s first test flight last year went awry due to software glitches, necessitating a redo this year (at the company’s expense). After spending more than a week trying to fix the Starliner capsule while still attached to an Atlas V rocket, Boeing recently acknowledged that it will have to take the capsule back to a Boeing facility to identify and address the root cause of the latest problem.

A rendering of the Starliner docking with the International Space Station.

This artist rendering remains the closest Boeing’s Starliner capsule has gotten to docking with International Space Station. Image source: Boeing.

The latest malfunction will delay the Starliner’s second test flight by months (at least), while adding to Boeing’s expenses. And with every setback, the risk that NASA abandons the Starliner program grows. After all, SpaceX has already operated multiple successful crewed missions for NASA.

Still a company in turmoil

Boeing has certainly had some successes in 2021. Most notably, it has won several big orders for the 737 MAX, including one for 200 MAX 8s and MAX 10s from United Airlines. The company also managed to return to profitability last quarter.

That said, Boeing’s aircraft order backlog has barely increased year to date, as cancellations have offset most of the new orders the company has won. Moreover, its backlog remains nearly 30% smaller than it was at the end of 2018. This backlog erosion alone will keep Boeing’s earnings and cash flow well below the highs reached a few years ago.

The widespread execution problems across Boeing’s business — ranging from 787 production to the 777X development process to the Starliner — make the company an even less attractive investment prospect. Management doesn’t seem to have a handle on the company’s operations, raising the risk of further costly problems. Simply put, Boeing needs to master the basics of running a high-tech industrial business to be a worthy investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

DDS – This Department Store Just Rang Up Record Earnings (Again)

Written by Adam Levine-Weinberg on . Posted in DDS, Stock Report.

Entering 2020, Dillard’s (NYSE:DDS) seemed to be a business on the decline. Net income and earnings per share had plummeted over the previous several years, due to subpar sales trends and steady margin compression.

Then, the COVID-19 pandemic hit, crushing sales and causing Dillard’s to report a massive loss for the first quarter of fiscal 2020.

However, since then, a funny thing has happened. Demand has come roaring back — and Dillard’s has gotten more aggressive about inventory management. That enabled the regional department store chain to post a record quarterly profit for the second straight quarter this week.

Dillard’s was struggling before the pandemic

Not that long ago, Dillard’s seemed to be stuck in a downward spiral. In fiscal 2014, the company generated $6.78 billion of revenue and a solid net margin of 5%. Adjusted net income totaled $328 million ($7.70 per share).

By fiscal 2019, revenue had receded to $6.35 billion. Moreover, the company experienced severe margin compression over that five-year period. It posted a full-year profit of $111 million ($4.38 per share) in fiscal 2019. Excluding asset sale gains and a one-time tax benefit, it recorded an adjusted profit of $90 million and adjusted earnings per share (EPS) of $3.56. This put its adjusted net margin at an abysmal 1.4%.

Chart showing downward trend in Dillard's net and operating income.

Dillard’s operating income and net income, data by YCharts.

Stiff retail-industry competition drove the bulk of this revenue decline and margin deterioration. However, management aggravated the company’s margin pressure by repeatedly buying too much inventory and subsequently being forced to offer deep discounts to clear it out.

A successful pandemic reset

Over the past year, Dillard’s — like many other retailers — has significantly improved its inventory management. For example, it entered the second quarter with $1.31 billion of inventory, down from $1.57 billion a year earlier and $1.83 billion the year before that. This enabled it to cut down on discounting and achieve record earnings in the first quarter. Adjusted EPS more than doubled compared to first-quarter 2019, despite lower sales.

Dillard’s second-quarter performance was even more impressive. Retail sales jumped 72% year over year and 12% compared to fiscal 2019, reaching $1.54 billion. Management noted that sales in the ladies’ apparel and footwear categories significantly outperformed other departments.

Meanwhile, retail gross margin soared to 41.7%, up from 31.1% a year ago and just 28.7% in the second quarter of 2019. Moreover, Dillard’s managed to post this sales growth while reducing its store hours compared to 2019 and thus cutting labor costs. As a result, operating expenses remained 11% below the level of Q2 2019. This enabled the company to post a profit of $186 million ($8.81 per share). Dillard’s hadn’t made money in the second quarter since 2016.

Cars in the parking lot outside a Dillard's store.

Image source: Author.

Clearly, Dillard’s is benefiting tremendously from pent-up consumer demand. And with U.S. consumers reportedly sitting on $2.6 trillion of excess savings as of the end of March, retailers haven’t needed to offer discounts to entice shoppers to open up their wallets.

This isn’t sustainable

In the near term, Dillard’s will probably keep posting incredible results. Pent-up demand could continue to lift sales of clothing and accessories for a few more quarters. Meanwhile, global supply chain challenges are helping to enforce lean inventory management across the retail industry. That should keep gross margin up significantly relative to 2019.

However, the fundamental challenges facing department stores haven’t changed. As demand normalizes and supply chain constraints ease, discounts will inevitably return as retailers start fighting for market share again. Furthermore, traffic to the low-quality malls where many Dillard’s stores are located will probably continue to sag in the years ahead, weighing on sales.

Dillard’s recent success has left it with more cash than debt. The company appears poised to use much of its $670 million cash hoard to buy back stock. That said, Dillard’s market cap has surged from well under $1 billion a year ago to over $4 billion today. To justify this price, Dillard’s will need to keep churning out extremely strong profits for years to come — and that may be too much to ask.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

GE – General Electric Continues Its Slow Recovery

Written by Adam Levine-Weinberg on . Posted in GE, Stock Report.

The COVID-19 pandemic hit at a bad time for General Electric (NYSE:GE). GE finally seemed to be gaining momentum in early 2020 after several tough years, but the pandemic disrupted its business: particularly its ultra-profitable aviation unit.

The pandemic continued to take a toll on General Electric — especially GE Aviation — last quarter. However, while it will take at least two more years for GE to recover fully, the company’s turnaround remains on track.

Decent Q2 results

GE generated $18.3 billion of revenue in the second quarter, including industrial organic revenue of $16.9 billion, sliding in just ahead of the analyst consensus. Revenue grew solidly on a year-over-year basis but remains well below pre-pandemic levels.

This improving revenue performance and GE’s ongoing cost cuts enabled the industrial conglomerate to post a 5.3% adjusted industrial operating margin. A year ago, it lost money on that basis. Adjusted earnings per share totaled $0.05: a penny ahead of the consensus. (The EPS figure is based on GE’s share count before the 1-for-8 reverse stock split that goes into effect this week.)

Finally, GE generated adjusted industrial free cash flow of $388 million last quarter: up both sequentially and year over year.

A wind power turbine in a green field, with a road in the foreground.

Image source: General Electric.

Healthcare shines again

All four of GE’s industrial segments improved their earnings results on a year-over-year basis in the second quarter. However, GE’s healthcare business has been its most important earnings driver recently.

The healthcare segment generated Q2 revenue of nearly $4.5 billion, up 10% organically from the prior-year period. That more than made up for a 4% organic revenue decline for GE’s healthcare business in Q2 2020. Moreover, cost and productivity measures helped the unit generate an impressive segment margin of 18% and segment profit of $801 million.

By contrast, the other three industrial segments recorded combined segment profits of just $376 million. The long-running turnaround effort in GE’s power business is starting to pay off, as that segment earned $299 million last quarter after posting a loss in Q1. The renewable energy unit is still losing money, though, and GE Aviation earned just $176 million, largely due to a non-cash charge related to expected losses for a single long-term service contract.

Balance sheet clean-up is going well

GE continued fixing its balance sheet last quarter, largely by using excess cash to execute a $7 billion debt tender offer. As a result, the company had just $63.5 billion of outstanding debt as of June 30: down from $134.6 billion at the end of 2017.

Additionally, management reiterated that it continues to expect to complete the sale of its aircraft leasing business to AerCap by year-end. That deal will generate at least $24 billion of cash proceeds, which GE will use to further reduce its debt.

An Airbus jet in the GECAS livery.

Image source: General Electric.

Finally, General Electric increased its full-year free cash flow guidance last week. The company now expects to generate $3.5 billion to $5 billion of industrial free cash flow in 2021, up from its prior guidance of $2.5 billion to $4.5 billion. GE will be able to apply this internally generated cash flow to debt reduction, as well.

Slow but steady progress

For a company with a $110 billion-plus market cap, GE didn’t earn a big profit or generate a lot of free cash flow last quarter. Nevertheless, its second-quarter performance should give long-term investors confidence in the company’s turnaround prospects.

GE’s healthcare unit shined again and its power business achieved a strong margin recovery. While the renewables business lost money, it reduced its loss both sequentially and year over year. And excluding the one-time contract margin review charge, GE Aviation would have earned a double-digit profit margin for the second consecutive quarter.

It will probably take two or three years for aircraft engine maintenance volumes to return to pre-pandemic levels, supporting a recovery in GE Aviation’s revenue and earnings. Meanwhile, GE still has work to do to turn its renewables segment around. But with the rest of the business gaining momentum and the balance sheet in good shape, GE stock could move significantly higher if the aviation and renewables units’ results improve as expected over the next few years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

ALK – Alaska Air Earnings: A Strong Recovery

Written by Adam Levine-Weinberg on . Posted in ALK, Stock Report.

As earnings season has gotten underway, many U.S. airlines have reported improving revenue and earnings trends, paving the way for a return to profitability this summer. However, excluding the impact of payroll support grants, the biggest U.S. airlines still recorded sizable losses last quarter.

By contrast, Alaska Air (NYSE:ALK) is ahead of the curve. Thanks to its domestic-focused route network and cost containment efforts, the Alaska Airlines parent nearly broke even last quarter, putting it in position to post strong profits in the second half of the year.

Remarkable sequential improvement

In the first quarter, Alaska Air recorded a huge adjusted net loss of $436 million on just $797 million of revenue: significantly less than half of pre-pandemic levels. Fortunately, demand accelerated as the quarter progressed. That trend continued over the past few months.

As a result, Alaska’s revenue nearly doubled sequentially, reaching $1.53 billion in the second quarter, down from $2.29 billion two years earlier. This helped the company limit its adjusted net loss to $38 million ($0.30 per share). The analyst consensus had called for a loss of $0.73 per share.

Including the benefit from government payroll support grants, Alaska Air reported a second-quarter profit of $397 million under generally accepted accounting principles (GAAP).

A rendering of an Alaska Airlines plane flying over clouds.

Image source: Alaska Airlines.

Importantly, the low-fare airline also generated $840 million of cash from operations last quarter. This dramatically exceeded the company’s initial quarterly guidance for $450 million to $550 million of operating cash flow. Excluding the $489 million of government payroll support funds that Alaska received during the quarter, operating cash flow was still a solid $351 million.

Momentum continuing into the summer

During Alaska’s earnings call on Thursday, management revealed that the company generated a strong 14% adjusted pre-tax margin in the month of June. That reflected a combination of normal seasonality, growing comfort regarding air travel among many consumers, and the official “reopening” of California on June 15.

This momentum has continued into the third quarter. Alaska Airlines expects unit revenue to rebound to around 2019 levels this quarter, with capacity and total revenue both down 17% to 20% compared to Q3 2019.

Lower capacity continues to put pressure on unit costs, with nonfuel unit costs on pace to rise 10% to 12% this quarter compared to the third quarter of 2019. However, while oil prices have rebounded rapidly in recent months, Alaska still anticipates paying less for jet fuel than it did two years ago. That should allow it to record an impressive double-digit adjusted pre-tax margin in Q3.

Looking ahead to the fourth quarter, Alaska Airlines expects to remain profitable, although its pre-tax margin will probably recede to the high single-digits. The spread of the Delta variant of COVID-19 poses some risk to this forecast, but so far, management hasn’t observed any change in bookings. Moreover, Alaska is less vulnerable than airlines with a greater focus on business travel and long-haul international travel.

A solid pick for long-term investors

Alaska Air stock has recovered most of the way to where it stood prior to the pandemic. However, it remains more than 20% below the 52-week high it touched a few months ago.

ALK Chart

Alaska Air stock performance, data by YCharts.

Notably, Alaska Air didn’t dilute shareholders to raise cash during the pandemic — unlike most of its rivals. Furthermore, its strong cash flow this year has reduced its net debt and lease liabilities to less than $1 billion: better than pre-pandemic levels. As a result, the company’s enterprise value has declined significantly more over the past year and a half than many of its peers.

Alaska’s strong balance sheet puts it in great position for an expected surge in capital spending next year associated with its fleet renewal plan. Those fleet upgrades will in turn reduce non-fuel unit costs and drive a big improvement in fuel efficiency over the next few years. Meanwhile, the airline’s moves to focus growth on its strongest markets (especially the Pacific Northwest) should boost unit revenue.

Thus, Alaska Air has a good chance to emerge from the pandemic even more profitable than it was in 2019. That gives this airline stock plenty of long-term upside for patient investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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