Inflation eases as two beaten retailers surge with solid profits
Despite the good economic news on inflation, stocks were mixed Thursday morning. The personal consumption expenditures (PCE) index, which the Federal Reserve relies heavily on when making interest rate decisions, was in line with economists’ expectations.
PCE, which measures how much consumers spend on goods and services, rose 3% in October over the past 12 months, down from 3.4% in September. Core PCE, which excludes volatile food and energy prices, rose 3.5% last month, down from 3.7% in September. On a monthly basis, PCE was flat while core PCE rose 0.2%.
Unlike the Consumer Price Index, which measures the prices of goods and services, PCE measures what consumers actually pay, and is closely monitored by the Federal Reserve. October PCE numbers support investors’ hopes that the Federal Reserve will stop raising interest rates.
The Dow Jones Industrial Average rose about 290 points, or 0.8%, in Thursday morning trading, while the S&P 500 was flat and the Nasdaq Composite was down slightly. Some of the best performers on Thursday were retail stocks.
Victoria’s Secret and Big Lots are leading the pack.
The two most moving stocks on Thursday were retail stocks. Victoria’s Secret (NYSE:VSCO) and big swallow (NYSE:Big). A favorable PCE report may have provided the upside, but these two bullish companies also benefited from solid earnings reports.
Victoria’s Secret was the biggest mover, rising about 16% the day after it reported earnings for its third quarter, which ended Oct. 28. Although net sales were down 4% year-over-year to $1.3 billion, revenue was $71 million. Net loss was within guidance range.
Moreover, although November’s numbers were not included in the earnings report, it represents the company’s best sales and margin results in two years. The women’s apparel company expects fourth-quarter net sales to increase 2% to 4% year-over-year. The stock was trading around $27 per share, but is still down 24% year to date (YTD).
Supermarket Big Lots also reported third-quarter earnings on Thursday, which sent its stock up 15% on Thursday. As of late morning, the stock is trading at around $5.50 per share, down 62% YTD. Big Lots generated $1 billion in net sales, down 14.7% year-over-year, but the decline was driven by a net decline in stores compared to the third quarter of 2022.
The retailer reported net income of $4.7 million, or 16 cents per share, but that included an after-tax gain of $133 million, or $4.53 per share, related to gains on real estate sales, distribution center closure costs and other benefits. It is related to Big Lots’ Project Springboard cost-savings initiative. Excluding after-tax benefits, adjusted net loss was $128 million, up from $87 million a year ago but better than expected.
The company is in turnaround mode and CEO Bruce Thorn is pleased with the progress so far.
“Project Springboard is on track to save more than $100 million in selling, general and administrative (SG&A) costs before the benefits are released this year,” Thorn said. “Project Springboard is off to a strong start and is on track to deliver $200 million in net revenue, including gross margin and SG&A. We expect a higher proportion of this to be realized on a run-rate basis by the end of 2024. ”
The company is also seeing improvement in its fourth-quarter operating income at a rapid pace, marking the first quarterly improvement year-over-year in three years. Big Lots expects quarterly year-over-year improvements to continue throughout 2024.
Beware of Retail Troubles
Keep in mind that these are all retailers that have struggled greatly over the past few years. Of the two, Big Lots has better prospects. The consensus price target is $6 per share, an 18% increase from current prices, while the consensus price target for Victoria’s Secret is $19 per share. Down 20% from current price.
