For Immediate Release
Chicago, IL – June 28, 2018 – Zacks Equity Research highlights RH (RH - Free Report) as the Bull of the Day, MercardoLibre, Inc. (MELI - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Chipotle (CMG - Free Report) and Yum! Brands (YUM - Free Report) .
Here is a synopsis of all four stocks:
Bull of the Day:
RH is seeing strong earnings growth as its Gallery and hospitality concepts roll out across the United States. This Zacks Rank #1 (Strong Buy) is expected to see triple digit earnings growth in 2018.
RH, formerly known as Restoration Hardware, operates retail Galleries and restaurants with the RH, RHModern and Waterworks brands in the United States. It also operates various online websites and publishes its Source Books.
Managing for Earnings Growth in Fiscal 2018
On June 11, RH reported its fiscal first quarter results and blew by the Zacks Consensus Estimate posting $1.33 versus the consensus of $1.01.
It was the 8th consecutive earnings beat in a row.
RH said early in 2018 that it would manage the business for earnings growth versus revenue growth. On that note, comparable brand revenue grew just 1% in the quarter despite a 4 point drag from last year's inventory reduction efforts. Adjusted for the reductions, comparable brand revenue rose 5% versus the 9% increase in the year ago period.
Operating margins of 9.6% were more than double its previous first quarter record of 4.4% in fiscal first quarter 2015.
It continues to build out its Galleries and will add 4 new buildings this year.
Portland opened in March and Nashville opened in June. New York's Gallery, which has been long delayed due to construction issues in the meatpacking district, is scheduled to open in September with Yountville, which is in the Napa Valley, opening later in the fall.
Three of the new Galleries will also get the integrated hospitality experience.
Raised Full Year Guidance
On the conference call, the CEO was bullish given the excellent economic conditions.
The company raised full year guidance including earnings per share.
Net revenue is now expected in the range of $2.53-$2.57 billion, up 5% to 7% on a comparable 52-week basis.
Earnings per share is forecast in the range of $6.34- $6.83.
As a result of the big earnings beat and bullish guidance, analysts have moved to raise their 2018 estimates.
11 estimates were raised since the earnings report with the Zacks Consensus Estimate jumping to $6.54 from $5.85. That's earnings growth of 114% versus fiscal 2017.
They're also bullish on 2019 as 9 estimates moved higher for next year in the last month as well. Analysts are looking for another 13.9% earnings growth in fiscal 2019.
Shares at New Multi-Year Highs
It's been quite the ride over the last 5 years as RH rolled out several new business lines including RHModern and RHTeen as well as its hospitality concept.
Bear of the Day:
MercardoLibre, Inc. is getting hit by increased competition, especially from Amazon, in the online marketplace. This Zacks Rank #5 (Strong Sell) is expected to see an 88% decline in earnings in 2018.
MercardoLibre is Latin America's leading e-commerce company with its websites MercadoLibre.com and MercadoPago.com.
Big Miss in the Fiscal First Quarter
On May 9, MercadoLibre reported first quarter results but missed on the Zacks Consensus for the 4th consecutive quarter.
It posted earnings of a loss of $0.29 versus the $0.48 estimate.
There are multiple analysts covering this company so it's not like there's only 1 or 2 and they can't get it right.
The headline numbers looked great as gross merchandise volume surpassed the $3 billion market for the first time, up 34% year-over-year in USD and up 42.7% on an FX neutral basis.
It saw a 50.6% increase in the number of items sold to 80.1 million.
Unique buyers jumped 28%, driven by Brazil and Mexico, two of its largest markets while Colombia and Chile also delivered solid results.
Total payment volume through MercadoPago rose 60.5% in USD and 81.7% on an FX neutral basis.
Estimates Slashed for the Full Year
If everything was so good, why are estimates being cut dramatically?
Amazon has entered into several of MercadoLibre's biggest markets, including Mexico. The company has to eat the difference as it rolls out free shipping.
In the first quarter of 2018 free shipping cost the company $112.5 million versus just $4.3 million in the first quarter of 2017.
The 2018 Zacks Consensus has fallen to $0.28 versus $1.93 just 2 months ago. By comparison, it made $2.53 in 2017 when it didn't have to pay for free shipping.
The analysts are also bearish on 2019 as 7 estimates were cut for 2019 as well, pushing the Zacks Consensus down to $2.35 from $3.55.
Shares Sink on Earnings Decline
The good news is that the underlying business is healthy in both the merchant category and in payments.
Shares had been on a tear the last 2 years with a gain of 105% but with the new free shipping dynamic, the shares have sold off.
They're down 11% year-to-date.
Because of the estimate cuts, the valuation is still insane, with a forward P/E of 1071.
Chipotle Stock Surging Thanks to New CEO
Since Brian Niccol became the CEO of Chipotle in March, Chipotle’s stock price has only gone up. According to CNBC, Chipotle’s stock move has been based solely on Niccol’s reputation. Prior to Chipotle, Niccol was the CEO at Taco Bell, owned by Yum! Brands, where he changed the image of the restaurant for better.
From introducing mobile order and pay to opening restaurants around the globe, Niccol transformed Taco Bell into a lifestyle brand. Similarly, Niccol plans to do the same at Chipotle with his prior success to make it more of a youthful and culturally relevant brand.
Niccol’s Past Success
In the past three years, Chipotle was not doing so well. The stock fell to its lowest level following food safety concerns, and this was a day before Niccol was to be named CEO. The stock price was at $251.33 per share. As of today, Chipotle’s stock is sitting at $459.35 per share.
In a press release by Yum! Brands, the CEO, Greg Creed, thanked Niccol on his success of always keeping Taco Bell culturally relevant, innovative and accessible for customers. Along with changing the restaurants slogan and introducing creative new food items, Taco Bell’s sales were up 5% last year, growing nearly $500 million according to CNBC.
With Niccol’s optimistic qualities, he is known for encouraging employees to pitch any ideas they might have in return for creating an inclusive workplace. And, his past experience in consumer-focused businesses and relevant skill sets in areas like marketing and operations, Niccol can help address any of Chipotle’s primary issues, like from the food safety incidents, says David Tarantino, an analyst at Baird.
What Does the Future of Chipotle Look Like?
Currently, CMG is a #3 (Hold) on the Zacks Rank, with a VGM score of ‘B.’ After its Q1 report with Niccol as CEO, Chipotle’s earnings surged over 33% year-over-year to $2.13 per share. Total revenue climbed as well by 7.4% to $1.15 billion.
With a new CEO who is experienced and dedicated as ever, consumers and investors alike can finally start to see Chipotle on a steady profitable trail. Recently, they also announced the addition of a few new menu items at their test kitchen in NYC, which could be a potential asset to the future success of the company as well.
With Niccol’s vision of rebranding Chipotle to be more young and fun, it could potentially become a go to spot, more than it already is for many food consumers.
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About the Bull and Bear of the Day
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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