Broad markets still are setting all-time highs as the earnings focus has turned to the consumer space. As they have been for most of the year, results have been mixed, but good enough to keep the rally going
A few key companies in the consumer sector still are set to report fiscal Q3 results over the next few weeks. Black Friday sales looked solid, but the real test for brick-and-mortar retailers will come as the key holiday season rolls on.
For the market as a whole, the news has been good enough. But many individual stocks in the consumer space still have their fair share of challenges — and a substantial amount of volatility.
Three of those companies report next week, with eyes on calming investor nerves and driving their share prices higher. With consumer confidence rising, and the economy strong, performance needs to be strong — or else investors may send their capital elsewhere.
Earnings Reports to Watch: AutoZone (AZO)
From here, the fiscal first quarter report from AutoZone, Inc. (NYSE:AZO) on Tuesday morning looks like the most important of the week. The numbers will be of importance not just to AZO, but peers Advance Auto Parts, Inc. (NYSE:AAP) and O’Reilly Automotive Inc (NASDAQ:ORLY).
Those three stocks stalled out in 2016 — and have simply rolled over in 2017, with AZO stock down 14% so far this year. But the group has rallied of late, with all three stocks up at least 28% from 52-week lows touched this summer.
The rally seems to make AZO, in particular, rather dangerous ahead of its report. The market sold off AutoZone after a fiscal Q4 beat in September, and shares plunged after the previous two earnings releases. But the stock has gained nearly 30% on basically no news since a 5% drop following that Q4 release.
AZO now trades 6.5% above the average Street target price, and expectations are rising heading into earnings. Given continuing online pressure on the space, that seems a dicey combination. An AZO miss would reverberate across the sector, as has been the case for the past two years. As such, I’d avoid the sector next week, or even consider a short of ORLY, which I believe is the weakest of the three.
Earnings Reports to Watch: H&R Block (HRB)
The fiscal Q2 report from H & R Block Inc (NYSE:HRB) on Wednesday morning very well could focus more on Washington, D.C. than Wall Street. HRB’s numbers outside of tax season generally aren’t material, and analysts aren’t expecting much. Consensus estimates project a loss of 72 cents per share, and revenue growth of just 0.3% year-over-year.
But the post-earnings conference call should draw some interest, particularly if Congress makes some progress on tax reform over the weekend. Reports have conflicted as to the impact of changes — notably the proposed increase in the standard deduction — on preparers like H&R Block and Liberty Tax Inc (NASDAQ:TAX).
Still, I wouldn’t expect much in the way of fireworks, even though HRB did fall a surprising 8% after a similarly quiet Q1 report in August. It’s unlikely HRB management will have much to say on tax reform, even if there’s enough of a plan from D.C. for management to be able to do so.
More broadly, the key questions surrounding H&R Block simply haven’t been answered. Will online DIY options like TurboTax from Intuit Inc. (NASDAQ:INTU) continue to take share? Does blockchain technology represent a long-term threat? The Q2 report isn’t going to offer much in the way of additional information, beyond (possibly) the company’s updated guidance for tax season.
With implied volatility rather high — the options market is pricing in a 9%-plus move between now and Dec. 15 — the smart trade here might be to sell a straddle or buy an iron condor, both of which would bet on a limited post-earnings move for HRB.
Earnings Reports to Watch: Lululemon (LULU)
The Street’s on-again, off-again, love affair with Lululemon Athletica Inc (NASDAQ:LULU) appears to be back on, as LULU stock sits near a seven-month high. I’d expect the fiscal Q3 report on Wednesday afternoon to keep the rally going.
To be sure, I’m not quite convinced by LULU long-term. The stock isn’t cheap by any means, trading at over 24x next year’s Street EPS estimates. Growth has been choppy, and competition from companies like Under Armour Inc Class A (NYSE:UAA) and Gap Inc (NYSE:GPS) banner Athleta will remain intense.
But Q3 looks like it could drive the stock higher, at least in the near term. Expectations aren’t particularly onerous, with analysts looking for 12% revenue growth (helped in part by new stores) and a similar rise in EPS. News for the retail space as a whole looks reasonably strong of late, and positive commentary on Black Friday should help. Investors appear to be asking for reasons to buy LULU stock at the moment, and the company seems to be performing well enough to satisfy the market.
Longer-term, the story here isn’t over by any means, and I’d expect fireworks in the Q4 report when Lululemon details its performance during the important holiday season. Until then, though, I don’t see enough to believe that LULU’s rally is ready to come to an end quite yet.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.