The Great AI Debate

It was the day of artificial intelligence (AI), with Nvidia’s 25% rally pulling the major stock indices into the green. The fierce AI debate continues among investors, but clearly, bulls have the short-term edge in the conversation. Let’s see what else you missed. 👀

Today’s issue covers Dollar Tree’s big shrink, the after-hours move in Gap shares, and the Best Buy consumer barometer. 📰

Check out today’s heat map:

4 of 11 sectors closed green. Technology (+3.84%) led, and energy (-1.78%) lagged. 💚

In economic news, pending home sales recorded no change in April as low inventory and affordability challenges persist. The Chicago Fed National Activity Index showed business activity picked up after several months of decline. And Federal Reserve Bank of Boston President Susan Collins noted “promising signs” that inflation is moderating, hinting at a June pause. ⏯️

Internationally, Indonesia’s central bank kept its benchmark rate at 5.75% for its fourth straight meeting, focusing on stabilizing the rupiah. Meanwhile, South Africa’s central bank raised rates to their highest level in 14 years amid stagflation fears. And finally, the European Union’s largest economy, Germany, entered a recession as high inflation weighed on household spending. 🔻

Shares of Dish Network initially popped over 10% on reports that it’s in talks to sell its wireless plans through Amazon, giving it a significant sales channel for its growing wireless business. 📱

Electric truck maker Nikola fell another 20% after receiving a delisting notice from the Nasdaq for not meeting the minimum $1 bid price requirement. 🪫

Other symbols active on the streams included: $MRVL (+24.07%), $SPCE (-8.15%), $PLTR (+4.99%), $SNOW (-16.50%), $APPS (-42.97%), $IEP (-13.83%), $BMR (+116.59%), and $WLDS (+211.47%). 🔥

Here are the closing prices:

S&P 500	4,151	+0.88%
Nasdaq	12,698	+1.71%
Russell 2000	1,755	-0.70%
Dow Jones	32,765	-0.11%

Earnings

Dollar Tree’s Big Shrink

It’s been a heavy week of earnings recaps, so we will keep today’s three main stories pretty light. Speaking of light, Dollar Tree shares are shedding some weight today after reporting lighter-than-expected profits.

Ok, we promise to stop using the word light from here on out. So let’s see what caused shareholders to turn to the dark side today. 👇

The dollar-store chain reported adjusted earnings per share of $1.47, which missed the $1.52 analysts expected. However, sales grew 6.1% YoY to $7.32 billion and topped the $7.28 consensus view.

On the positive side, inflation and economic uncertainty continue to push more shoppers down the value chain to dollar stores. However, they’re spending money on lower-margin items and are apparently stealing a lot more. 🥸

CEO Rick Dreiling said, “While we are maintaining our full-year 2023 sales outlook, we are adjusting our EPS outlook as we expect the elevated shrink and unfavorable sales mix to persist through the balance of the fiscal year.” The sentiment echoes commentary from several other retailers that noted an uptick in organizing robberies in their stores.

As a result, the company’s revised full-year earnings forecast dropped from $6.30-$6.80 to $5.73-$6.13 per share. 🔻

On a positive note, executives do expect the benefits of lower ocean freight rates to flow through to earnings in the second half of the year. But that’s unlikely enough to offset the other factors’ negative impact. $DLTR shares traded down 12% toward one-year lows following the news. 📉

Earnings

Retailer Gap’s Big Gap

Mall retailer Gap is popping after hours following a narrower-than-anticipated loss. 🤏

The company’s adjusted earnings per share were $0.01, driven by drastic cost-cutting efforts over the last year. Heavy discounting to clear inventory and high air freight expenses had weighed on margins last year but are abating. As a result, gross margins of 37.1% were up 5.6% YoY and 3.5% QoQ.

Meanwhile, revenues fell 6% YoY to $3.28 billion, just shy of estimates. Comparable sales were down 3%, and store sales dropped 4%. Online sales dropped a more drastic 9%, though executives say it’s primarily due to sales trends returning to historical norms well above pre-pandemic levels. 🛒

Here is how its main brands performed: 🏬

Old Navy sales -1% YoY to $1.8 billion, comparable sales -1%
Gap sales -13% YoY to $692 million, comparable sales +1%
Banana Republic sales -10% YoY to $432 million, comparable sales -8%
Athleta sales -11% YoY to $321 million, comparable sales -13%

The company acknowledged the challenges ahead, saying it’s working hard to understand its consumers better. It’s also working to establish new leadership that can help drive initiatives to regain its market share and reaccelerate sales. That said, it maintained its full-year outlook for a net sales decline in the low to mid-single-digit range. It’s also expecting continued gross margin expansion as it reduces capital expenditures by $500 to $525 million. 🔺

$GPS shares rebounded 15% from one-year lows on the news. Investors will be watching to see if this rebound lasts in the days and weeks ahead. 👀

Earnings

The Best Buy Barometer

Best Buy shares remain roughly 50% off their pandemic-driven 2021 highs. Much of that has been driven by a slowdown in spending on discretionary goods like computers and household appliances. Although those factors offered a skewed perspective, we can still consider the consumer electronics retailer as a partial measure of consumers’ health. 🧭

In the first quarter, the company reported adjusted earnings per share of $1.15 on revenues of $9.47 billion. That was mixed vs. the $1.11 and $9.52 billion expected. Comparable sales fell 10.1%, also in line with expectations.

As we’ve heard from almost every retailer so far, consumers continue to spend more on necessities. And when they’re making discretionary purchases, it tends to be experiences rather than goods. Best Buy CEO Corie Barry reaffirmed that theme: “We’ve been seeing a consumer who is — whether or not you call it a recession — exhibiting some recessionary behaviors.” ⚠️

As a result, Best Buy reaffirmed the outlook it provided in March. It’s expecting full-year revenue of $43.8 to $45.2 billion, with a comparable sales decline of 3% to 6%.

With that said, the company is not taking this slowdown lying down. Below are several initiatives it’s been working on. ⚔️

Growing online sales to a third of total revenue
Cutting costs by shaking up its workforce and store footprint
Revamping its membership program to help diversify its revenue and boost spending
Diversifying its business away from solely consumer electronics, partnering with Atrium Health to sell devices and handle the installation of home hospital care equipment

With shares trading at roughly the same level as a year ago, it appears investors are looking past the current challenges and ahead to the future. As a result, $BBY shares were up about 3% despite the lackluster results. 👍

Bullets

Bullets From The Day:

🎫 MoviePass is trying to write its own comeback story. If you were around markets between 2017 and 2019, you remember the MoviePass drama that ensued. The company, which had been around since 2011, lowered its prices drastically in 2017, allowing customers access to unlimited movies for $9.95/month. Unfortunately, those unit economics quickly proved unsustainable, with the company falling into bankruptcy and investors suing executives for lying about the business model’s profitability. Now, co-founder Stacy Spikes is returning the service under the same name but, hopefully, a more sustainable business model. The Verge has more.

📋 Microsoft joins AI giants in calling for regulation. The tech giant laid out five principles the government should consider to regulate artificial intelligence as it looks to catch up with fast-moving technology. Part of those suggestions included adopting a framework from the financial services sector, Know Your Customer (KYC). However, in this case, it would be KY3C, meaning AI developers should know their cloud, customers, and content to limit fraud or deceptive use. More from CNBC.

🤝 3D printing stocks in talks over $1.8 billion merger. 3D printing is still a thing, though it’s not as hot a topic as it was nearly a decade ago when it took the stock market by storm. However, one of the industry’s remaining players, Stratasys, is in talks to acquire Desktop Metal Inc. in an all-stock deal valuing the combined company at $1.8 billion. The acquisition would help create a leading 3D printer company in the fragmented industry. Yahoo Finance has more.

🔺 Carl Icahn scores a small win at Illumina while his IEP shares tank. While activist investor Carl Icahn’s own stock is down more than 50% for May, he’s pressing on in his attempt to shake up management at biotech giant Illumina. The proxy fight ended with shareholders voting chairman John Thompson off the board of directors on Thursday, with Icahn’s nominee Andrew Teno receiving the majority of the votes to replace him. He had hoped to score three board seats. However, after months of fighting, he did not secure more than the one board seat the company initially offered. More from Axios.

🙃 Higher rates are causing some small-time multifamily investors to go belly-up. Over the last few years, small investors have been pooling their money together under the reign of one or two leaders in an arrangement known as syndication. Unfortunately, the structure often provides syndicators ways of profiting regardless of an investment’s performance, leaving investors with little recourse when an investment goes badly…as they are beginning to. With syndicators raising at least $115 billion from investors between 2020 and 2022, there’s a lot of money at risk in the current real estate environment. We can likely expect more of these stories ahead. The Real Deal has more.