Talk about a mixed day of earnings releases.
Overall, I still think we are in the midst of a better-than-decent earnings season. Things could have been much worse, seeing as U.S. consumer spending didn't pick up until the latter half of the second quarter and global PMIs have been tepid. Moreover, countless companies across many different industries had rather rough first quarters and hammered away at their clearly overconfident guidance, citing weak macros and the unknown that was the Brexit vote. So far, we haven't received a new leg down in guidance for many of the big-name companies, and that is supportive of the bullishness in the market. The reality growth expectations for companies this year aren't exactly robust, which should prevent the Fed from getting too aggressive on interest rates.
Here are some quick takes on several results I am covering today.
McDonald's Quarter Basically Stunk
McDonald's (MCD) delivered a big bag of steamy dung to the bulls.
There is no other way to put what the Golden Arches reported for the second quarter on Tuesday. While investors were likely prepared for a modest sequential slowdown in sales due to challenging conditions in the restaurant space, the actual number -- 1.8% increase vs. a 5.4% gain in the first quarter -- was materially worse.
What I didn't like while going through the results:
Low-quality earnings beat fueled by a mind-boggling amount of share repurchases. While it's good that McDonald's is making good on its promise to buy back stock amid its cost-saving efforts, especially with the stock under pressure in the second quarter, the bottom line was not deserving of the market's continued bullishness on the stock.
We are unlikely to receive granular details on how McDonald's plans to jump-start its U.S. business. Sure, it signaled it will expand its all-day breakfast menu and enhance its core menu items, but McDonald's is a secretive bunch. Given the sales slowdown in the U.S., the market needs information that it's unlikely to get right now. McDonald's needs to get one clear value message into the marketplace and start introducing new products that truly grab the attention of people. Not sure this will happen in entirety.
It's bothersome that during a pocket of sluggish spending in the U.S., McDonald's sales didn't stay strong. More people should have flocked to McDonald's in the second quarter, not materially less. The fact they didn't underscores why McDonald's badly needs a robust national value menu and perhaps some new lower-priced offerings.
Verdict: Don't chow down on the stock.
Under Armour Deserves a Closer Look
The market has no idea what to make of the information Under Armour (UA) tossed its direction Tuesday.
Was the second quarter clean? Definitely not, as the company delivered a rare earnings miss, growth rates by product category slowed sequentially and inventory levels remained elevated relative to sales (though rates did cool sequentially, which was a good sign). All in all, I think the market factored in these elements to Under Armour's story in the weeks heading into the earnings release. (Under Armour is part of TheStreet's Growth Seeker portfolio.)
What investors likely haven't factored into their thinking on Under Armour:
- Major launch at over 600 Kohl's (KSS) stores in the first quarter of 2017. Kohl's tells me the launch will basically span the entire store, even UA's first home-goods offerings. Big sales boost here given the company unlocking this distribution channel. I believe this will lead to a launch at C. Penney (JCP) by holiday 2017 or 2018.
- Under Armour is taking the brand into a higher-end line, more everyday clothing with its trademark materials. It will go head to head with Nike's (NKE) casual wear. There is no reason why Under Armour shouldn't be able to steal share from Nike in this category as well over the next five years.
- My sense from extensively covering Under Armour is the market is underestimating long-term sales potential in China and more broadly from operating stand-alone retail stores.
Verdict: Nibble at Under Armour shares.