For Immediate Release
Chicago, IL – May 11, 2020 – Zacks Equity Research highlights Sprouts Farmers Market (SFM - Free Report) as the Bull of the Day and Tapestry (TPR - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Chegg (CHGG - Free Report) , Netflix (NFLX - Free Report) and Zoom (ZM - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Based in Phoenix, AZ, Sprouts Farmers Market is a health & wellness-focused grocery store chain that offers customers a wide selection of fresh produce, bulk foods, vitamins, and natural and organic items.
Q1 Earnings Better-Than-Expected
Adjusted diluted earnings per share of 79 cents easily beat the Zacks Consensus Estimate, and the company sees a positive earnings impact from the coronavirus pandemic of around 22 cents per share.
Comparable store sales surged 10.6% during the quarter, while net sales of $1.6 billion increased 16% year-over-year.
“During the first quarter, the COVID-19 crisis led to a significant increase in sales as consumers bought more food to consume at home. As we navigate these ever-changing circumstances, we remain steadfast and decisive, prioritizing team member and customer safety and remaining in-stock on fresh, healthy food for our communities, all the while not losing sight of our transformational strategy that will set us up for long-term success,” said CEO Jack Sinclair.
As for new, additional safety measures, Sprouts is increasing the cleaning and sanitation of its stores and implementing social distancing protocols as well. Sprouts also gave its employees $2 extra per hour during the crisis in March.
Even though the pandemic has created a sense of uncertainty, the company has laid out long-term growth strategies that will help drive profitability: refocusing attention on its target customers, expanding in select markets, and refining its brand and marketing approach
Key Valuation & Earnings Growth
Shares of SFM have gained more than 27% compared to the S&P 500’s drop of roughly 9.7%. Earnings estimates have been rising, and Sprouts is a Zacks Rank #1 (Strong Buy) right now.
For the current fiscal year, five analysts have revised their bottom line estimate upwards in the last 60 days, and the Zacks Consensus Estimate has moved up 22 cents to $1.50 per share; earnings are expected to increase 20% compared to the prior year period. 2021 looks strong as well, with earnings expected to continue positive year-over-year growth.
SFM also offers potential investors value. It only trades at 19X trailing 12-month earnings, well below it’s the broader Retail-Wholesale market (27.5X).
If you’re an investor searching for a grocery stock to add to your portfolio, make sure to keep SFM on your shortlist.
Bear of the Day:
Formerly known as Coach, Inc., Tapestry is a luxury retailer that owns and operates the Coach, Kate Spade & Company, and Stuart Weitzman brands. All three offer popular lifestyle products like handbags, clothes, shoes, and fragrance.
How the Coronavirus Crisis is Impacting TPR
Tapestry reported fiscal 2020 third quarter results at the end of April, and the coronavirus pandemic has hit the business hard.
Adjusted net loss was 27 cents a share, much wider than what analysts were expecting and down significantly compared to the $0.42 per share in Q3 2019. Revenue totaled $1.07 billion compared to $1.33 billion in the prior year period.
Brand-wise, Coach reported operating income of $38 million, falling over 84% year-over-year. Kate Spade posted an operating loss of $91 million, while Stuart Weitzman’s operating loss was $531 million.
During the quarter, 90% of the company’s stores were either closed or operating on reduced hours, though a degree of normalcy has returned to areas like Korea and Mainland China.
Tapestry is now ultra-focused on conserving cash and reducing spending. The company has slashed orders for later in the year, suspended its quarterly dividend and share buyback programs, and drew down $700 million (of $900 million total) of its revolving credit facility.
Management provided no guidance for the current quarter because of the overall economic uncertainty, but TPR is moving to adapt to a changing retail landscape.
“We are accelerating key elements of the transformational work we began prior to the crisis, notably driving outsized growth in digital and creating a more streamlined and data-driven organization,” said CEO Jide Zeitlin.
Shares have plummeted over 43% year-to-date. TPR is now a Zacks Rank #5 (Strong Sell). 11 analysts have cut their full year earnings outlook, and the consensus estimate has fallen $1.55 from $2.21 to $0.66 a share.
For nearly all economic sectors, the real damage from the coronavirus is still uncertain.
Tapestry’s future revenue, earnings, and cash flow are still up-in-the-air, and won’t be able to be determined until and the length of the outbreak is figured out. It’s probably best to avoid retail stocks like TPR for the time being.
Is This the Latest Stock Immune to Coronavirus?
Chegg shares have skyrocketed since its first-quarter results wowed Wall Street on May 4. The company, which began as an online textbook hub, has expanded into a diverse digital educational platform that had already proved it’s poised to grow in a quickly changing learning environment, and then the coronavirus forced everyone to stay at home.
The Chegg Notes
CHGG allows students, particularly college students, to buy, rent, and sell textbooks online. Chegg’s tagline used to be “Saving broke students one textbook at a time.” The firm still boasts that people can “save up to 90% on textbooks." This is a solid niche market in an e-commerce age where Amazon dominates online book sales.
Today, however, the Santa Clara, California-headquarter firm is much more of a learning services-focused company, or what it calls a “direct-to student learning platform.” Chegg offers online tutors, test prep, and other help on everything from math to writing.
Plus, CHGG runs an online internship and job search platform and other tools that aim to help students find employment. And its new pitch is now “A Smarter Way to Student.”
Quick Q1 Overview
Schools around the U.S. and the world closed in an effort to slow the spread of the coronavirus. And despite economies slowly starting to reopen, it is unclear when schools will. More importantly, digital learnings was already becoming widely popular, as college costs continued to soar. “Our belief is that, in every industry, a crisis often accelerates the inevitable and that is what we see happening in higher education,” Chegg CEO Dan Rosensweig said in prepared remarks.
Chegg’s first quarter revenue jumped 35%, with its services sales up 33% to account for 76% of its total revenue. The firm also saw the number of Chegg Services subscribers surge 35% to roughly 3 million. And Chegg’s chief executive said it “saw a substantial increase in new subscribers, both domestically and globally,” as well as a “marked increase in engagement” from its existing subscribers.
CHGG also noted that it was seeing a “meaningful increase in the take rate” of its new Chegg Study Pack much earlier than it expected. And the company forecasted that the momentum it experienced at the end of the first quarter will carry over into Q1, with it calling for its “Q2 subscriber growth to be greater than 45%.”
Before we look ahead, we need to understand what Chegg stock has done. Chegg shares have now soared roughly 40% since its May 4 release, from under $44 a share to new highs of around $62.63—as of late afternoon Friday.
CHGG is up over 65% in 2020, against its industry’s 6% climb and the S&P 500’s 11% downturn. Investors can also see that CHGG stock has soared over 600% in the last five years.
The recent climb has stretched its valuation picture, with it now trading at 13.2X forward 12-month sales estimates. This comes in above its 9.5X median over the last two years. Therefore, a pullback might be in order. But in these uncertain, times Wall Street might remain focused on firms that can grow during the pandemic, especially ones that seem poised for longer-term expansion within a future-looking industry.
With this in mind, our current Zacks estimates call for CHGG’s second quarter sales to climb 45.5%, with full-year sales expected to jump roughly 35% to reach $552.65 million. This would crush 2019’s 28% expansion and 2018’s 26% revenue growth. And Chegg’s 2021 revenue is expected to surge another 23% higher.
Meanwhile, Chegg’s adjusted second quarter earnings are expected to pop 48% to come in at $0.34 a share. Overall, the company’s adjusted fiscal year EPS figures are projected to jump 33% and 22%, respectively.
Chegg’s earnings outlook has improved since it reported, which is no easy task as the coronavirus wreaks havoc on companies big and small. This positivity helps CHGG earn a Zacks Rank #1 (Strong Buy) within an industry that sits in the top 16% of our more than 250 Zacks industries.
Clearly, some investors might want to wait for a pullback after Chegg’s massive post-earnings rally. That said, stocks that can stay above the pandemic fray are likely to prove valuable for some time, from Netflix to Zoom and beyond.
Longer-term investors might want to consider Chegg as a bet on the future of education becoming more digitally focused, especially as costs and student debt grow out of control.
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