Earnings Preview

We’re between earnings seasons but, we do have several companies that report at odd times during the year. This week we have General Mills, Darden Restaurants and FedEx reporting their first quarter while Autozone reports their fourth quarter.

All these companies are quite important in their space and are important to gauge the macro environment.

This Week’s Earnings

Earnings covered in this update

General Mills (GIS) - Q1, 2024 earnings preview

General Mills gapped down on earnings last quarter because of a miss on revenues. They beat EPS and Operating Income estimates. But, this isn’t altogether surprising. With inflation declining to a large extent companies will have to revise their pricing and therefore, revenue numbers will gradually have to come down. They missed revenue estimates across every division.

This time around, estimates are probably more in line with what is achievable but, we expect them to miss on the pet food division. We’re seeing the pet space get more and more challenging with consumers opting not to adopt pets.

The company reaffirmed their full year guidance during the recent Barclays conference and sees EPS of +4-6% yr/yr to ~$4.47-4.56, excluding non-recurring items, vs. $4.50 FactSet Consensus.

Further notes from the Barclays conference: “With a more stable supply chain allowing for more resources to be redirected toward productivity, the company remains on track to step up its Holistic Margin Management cost savings to 4 percent of cost of goods sold in fiscal 2024, compared to 3 percent generated in fiscal 2023.”

General Mills has warned that they see consumer spending softening and they were leaning negative on their comments during their last earnings. They see both prices and volumes declining in the months to come. We would be looking out for more comments surrounding the consumer and progress regarding declining pricing and volumes.

Darden Restaurants (DRI) - Q1, 2024 earnings preview

Darden Restaurants, Inc. operates through the following segments: Olive Garden, LongHorn Steakhouse, The Capital Grille, Eddie V's restaurants, Cheddar's Scratch Kitchen, Yard House, Seasons 52 and Bahama Breeze restaurants. As of May 2023, they had 1,914 outlets. And most recently they announced the acquisition of Ruth Chris Steakhouse.

Shares decline on earnings last quarter as revenues came in line but, same-store sales missed by 0.30%. Olive Garden didn’t perform as expected. EPS came in at $2.58 a $0.04 beat. Restaurant margins came in ahead.

The restaurant space has seen unusual strength over the past 8-10 months, even with prices remaining high. Darden’s advantage is that they have a breadth in terms of offers covering casual and fine dining across various cuisines. We do expect that now the consumer is gradually getting tapped out and we’re likely to see weaker numbers from the restaurants. We saw almost every restaurant take a hit during the Q2 earnings season.

Moreover, the acquisition of Ruth Chris is certain to put a strain on the company with positive synergies kicking in only in 2025.

While we’re not super negative on results, we do see tougher comparisons for the company this quarter and we expect some softening in the top line numbers. For restaurants, there are two numbers to keep an eye on

• Comp sales or Same-store sales Growth - Estimate for the Quarter is +3.8% which is lower than last quarter’s achieved growth at +4% (estimate was 4.3%). This is important to understand whether consumers are still frequenting restaurants.

• Restaurant Level Margin - Estimated at 19% for this Quarter. Last quarter came in at 21.8% vs the estimate of 21.5%. Darden actually has quite an impressive restaurant level margin. 10% -15% is considered good. (For comparison, both McDonald’s and Texas Roadhouse have margins of about 15%)

We would be looking out for comments surrounding the number of visits from customers, changes to restaurant pricing, if any and whether costs are increasing again.

FedEx (FDX) - Q1 2024 earnings preview

Last earnings report

The shipping and logistics company is scheduled to release its earnings report on Wednesday, and Wall Street expects the company to post earnings of $3.73 per share on revenue of $21.8 billion. In comparison, the year-ago quarter had earnings of $3.44 per share on revenue of $23.58 billion. In the last quarterly results, FedEx's Express segment, which accounts for about half of the company's revenue, missed analysts' quarterly revenue estimates by approximately $350 million.

Reduced shipment volumes were largely blamed for the shortfall. However, the Ground segment saw an uptick in revenue per package, despite also suffering from weak volumes. Amid macroeconomic challenges in the U.S. and Asia, as well as service issues in Europe, all three business segments of the company experienced lower shipping volumes.

Management has been working on offsetting this volume weakness through improved yields and reduced expenses. Source

Expectations for this earnings report

The stock has risen 46% year-to-date, significantly outperforming the 16% rise in the S&P 500 index. Despite a recent 5% dip, the stock remains one of the better performers in the Dow Jones Transportation Average.

Currently trading at $254, the stock has added more than $20 since its last earnings results. The company has shown vulnerabilities in its core operations, particularly in package volume, and will need to prove its execution capabilities in the upcoming report. Investors will be keenly watching for profitability and volume improvements among the company's various business segments.

Highlights from the last earnings call

In the last earnings call, FedEx's management discussed various challenges and strategies across their business segments. The Express segment, which accounts for about half of the company's revenue, saw a decline in adjusted operating income by 47%, and its margin contracted by 320 basis points to 5% due to a 7% decrease in package volumes.

On the other hand, the Ground segment's operating income increased by 18%, and its operating margin expanded by 210 basis points to 12.1%, even though volumes were down by 6%. The Freight segment also experienced a decline in operating income by 26%, and its operating margin declined by 210 basis points.

Management expressed their confidence in navigating these challenges and highlighted ongoing efforts to improve revenue quality and create meaningful differentiation in their services. They also discussed strategies to offset volume weakness through improved yields and reduced expenses.

Recent news and other items to watch

Recent news indicates that FedEx is planning a consolidation of its operating companies to align its long-term incentive plans. This move is designed to further streamline operations and cut costs.

Additionally, a Bloomberg article dated April 10, 2023, suggests that FedEx is contemplating a future with no drivers on its payroll, indicating a potential shift towards automation. Source

Investors should keep an eye on how the company addresses its volume challenges and any updates on their consolidation and automation plans. The macroeconomic environment, particularly in the U.S. and Asia, will also be a crucial factor to watch.

AutoZone (AZO) earnings preview Q4

Last earnings report

The Memphis-based auto parts and accessories retailer, is set to announce its Q4 earnings before the bell on Tuesday. In its last quarterly report, the company's Q3 revenue fell short of consensus estimates due to weather-related challenges and some internal execution issues.

Despite the revenue miss, the company reported a total sales growth of 5.8% and a 1.9% domestic same-store sales comp. Operating profit grew by over 9%, and EPS growth was 17.5%, marking the highest growth rates the company had seen in over a year.

The company attributed the lower-than-expected sales to cool, wet weather in March and lower snow accumulations in February and March, which impacted customer traffic. Source

Expectations for this earnings report

For the upcoming Q4 earnings, the consensus EPS estimate is $45.29, and the revenue estimate is $5.61 billion. Given that AutoZone has exceeded EPS and revenue estimates for eight straight quarters, expectations are high.

Wall Street analysts have given the stock a Buy rating, and the stock has increased by 21% over the past year. Analysts predict that AutoZone's strategic positioning and expansion into new markets will further enhance future earnings.

Highlights from prior transcript

In the last earnings call, AutoZone's management emphasized their focus on providing "WOW! Customer Service" and highlighted their plans for expansion, particularly in the commercial sector. They reported that their 84 mega hubs had significantly higher sales than the rest of their commercial footprint and announced plans to open 22 to 25 new mega hubs in FY '23.

The company also mentioned that they had unintentionally de-emphasized some of their tried-and-true disciplines during their rapid growth, which they plan to refocus on. The company's CEO, Bill Rhodes, stated that they were "lapping tremendous growth last year and had some internal and external factors that impacted our growth this quarter."

He also mentioned that they had "unintentionally de-emphasized some of our tried and true disciplines" and that they must get back to their "well-known and highly regarded flawless execution," which he believes will help reignite top-line growth.

Recent news and other items to watch

In recent news, AutoZone announced a leadership transition plan and has been the subject of several analyst ratings. On July 18, 2023, it was reported that VP Charles Pleas III sold 4,200 shares of AutoZone stock. The company is also planning to significantly and aggressively expand its store footprint in Brazil over the next five years. Source

Investors should keep an eye on how the company addresses the internal execution issues mentioned in the last earnings call, as well as any updates on their expansion plans, particularly in international markets. Weather patterns, which have previously impacted sales, could also be a factor to watch.

If you have any questions or feedback, let us know in the comments below. Have a great week!