The European Central Bank will be front and center next week as the bank prepares for its monthly policy meeting on Thursday. ECB President Mario Draghi has been heard discussing the bank’s willingness to ease further if need be over the past month, and investors will be watching to see if he follows through on his remarks. Data from the region has been mediocre at best recently and most expect that the bank will be forced to act eventually.
Key Earnings Reports
Next week earnings releases will be thin with Kroger Company KR and Dollar General Corporation DG expected to report.
Kroger Company
Kroger is expected to report third quarter EPS of $0.61 on revenue of $24.82 billion, compared to last year’s EPS of $0.53 on revenue of $22.50 billion.
On November 26, Deutsche Bank gave Kroger a Buy rating, saying that the company has had a strong fourth quarter.
“In contrast to our Oct. 27 preview (for EPS through Nov. 6), all the companies in this report - UNFI, KR, PTRY and CASY - have had strong share performance in 4QTD. As a result, relative valuation metrics deteriorated at all 4 companies. In this preview, the companies can be split into 3 groups: 1) ROIC is generally improving (KR); 2) ROIC is stable, but low (PTRY); and 3) ROIC is declining (UNFI & CASY). In general, we favor companies that have an improving relative value metric and a metric that is below historical levels.”
On October 29, Merrill Lynch gave Kroger a Buy rating with a $60.00 price objective, saying that the company has several long term opportunities.
“We believe KR will continue to execute well over the LT, supported by investments in technological innovation to support sales growth and efficiency (ex. QueVision significantly reduced check-out times without added labor costs). We expect a return to 8-11% EPS growth plus growing dividend in F16 following this year’s above trend 13-15% growth supported by the Harris Teeter acquisition.”
On October 29, Credit Suisse gave Kroger a Neutral rating with a $52.00 price target, noting that the company had plenty of catalysts for growth in the future.
“Kroger management again used its annual analyst day to highlight the key drivers of its winning model and reiterate its conviction behind strong long-term growth. The day was light on incremental, new information, but included positive updates to strategy on merchandising initiatives in corporate brands, growth in natural and organic, and its digital/e-commerce capabilities. The company also provided a positive update on recent sales trends and reiterated its full year earnings guidance. We continue to rate KR Neutral. While we believe the company is positioned for long-term share gains given its differentiated model and have been impressed with its results in a highly competitive industry, the risk/reward seems balanced at the current valuation.”
On November 22, S&P Capital IQ gave Kroger a Buy rating with a $68.00 price target, noting that the company’s recent acquisition will be a catalyst for growth.
“We believe the company's acquisition of Harris Teeter Supermarkets in January 2014 will help improve its market share position in southeastern markets. Despite pricing pressure we see in a highly promotional competitive environment, we believe Kroger will be able to support operating margins due to improved purchasing power, the sharing of best practices with HTSI, and an improved product mix with a strong private label offering.”
Dollar General Corporation
Dollar General is expected to report third quarter EPS of $0.80 on revenue of $4.75 billion, compared to last year’s EPS of $0.72 on revenue of $4.38 billion.
On September 2, Merrill Lynch gave Dollar General a Buy rating with a $73.00 price objective following the company’s bid for Family Dollar.
“In our view , a potential DG/FDO merger would be a win-win for all parties. For FDO shareholders, DG’s $80 all-cash offer is higher and synergies and earnings growth potential are much more attractive. DG management assumptions, which we believe could be conservative, include low DD EPS growth within the first year and cost synergies of$550-600mn, about double the synergies from a DLTR deal. DLTR would benefit from a $300mn termination fee if FDO accepts the DG offer. We continue to believe DLTR will be a better operator as a standalone entity. We still believe a DLTR counter-offer is unlikely as leverage would already be 5.6x at its curent $74. 50 offer (we estimate would increase to 5.8 x at $80) , synergies are far lower,and share price response has been muted since DLTR made their original offer on July 28th. We believe today’s $80 offer will be the last bid DG will need to make as they have thoroughly addressed the anti-trust issues and agreed to a $500mn reverse break-up fee.Moreover, DG has stated that they will consider taking their proposal directly to FDO shareholders if the board fails to engage.”
On September 2, Credit Suisse gave Dollar General an Outperform rating with a $74.00 price target, saying that the company’s FDO bid is likely to become a positive in the future.
“DG this morning put forth an updated $80 bid for FDO and attempted to squarely address FDO's concerns around antitrust clearance. Included in the new offer is a $500 million reverse break-up fee to be paid to FDO in the event FTC prevents the deal from closing. DG also stated that it is willing to divest up to 1,500 stores (~18% of FDO's store base), but continues to believe 700 divestitures would be more than enough. Driving DG's confidence that antitrust will not be a sticking point is the company's belief that 1) WMT is the key competitor in the space, 2) ~75% of DG SKUs are priced nationally, 3) DG's competitive market includes a broad array of retailers such as mass, club, drug and grocery, and 4) DG primarily serves as a "fill-in" destination, not a "stock-up" trip. We agree and believe antitrust should not derail this transaction, especially given today's changes to the offer. While not yet accepted by FDO and the eventual purchase price could be higher if DLTR counters, we continue to believe there is a strong likelihood of DG eventually winning the asset. DG clearly has the ability to pay much more than DLTR, as we estimate synergies could approach $1 billion in cost and revenue benefits and see accretion at $1-2 per share. We believe this combination makes much better strategic sense than a DLTR/FDO deal and it would clearly provide the next leg to what has already been one of the most attractive investments in retail.”
On November 22, S&P Capital IQ gave Dollar General a Hold rating with a $67.00 price target, saying that the company will likely see more competition next year.
“We believe DG will face more intense competition in FY 15 after its closest peer Family Dollar reported negative comparable store sales growth during the holiday and winter seasons and a negative outlook for the fiscal year. However, while we believe the company's core low-income customer remains under intense economic pressure due to a weak job growth market, we think year-to-year comparisons will get easier after we anniversary cuts to Supplemental Nutrition Assistance Program benefits.”
Economic Releases
Next week holds several important economic releases, with US non-farm payrolls data taking the spotlight. Most expect that the report will show that US employers added over 200,000 new jobs in November, an encouraging sign for the nation’s economic recovery and another reason the Fed may decide to raise interest rates earlier than expected.
Daily Schedule
Monday
- Earnings Releases Expected: Fifth Street Finance Corp FSC, Shoe Carnival Inc. SCVL, Thor Industries, Inc. THO
- Economic Releases Expected: Spanish manufacturing PMI, Italian manufacturing PMI, French manufacturing PMI, German manufacturing PMI, Italian GDP, eurozone manufacturing PMI, British manufacturing PMI, US manufacturing PMI
Tuesday
- Earnings Expected: Bob Evans Farms, Inc. BOBE, Bank of Montreal BMO
- Economic Releases Expected: British construction PMI, eurozone PPI, Australian GDP, Chinese service PMI
Wednesday
- Earnings Expected: Abercrombie & Fitch Company ANF, PVH Corp PVH
- Economic Releases Expected: Spanish services PMI, Italian services PMI, French services PMI, German services PMI, eurozone services PMI, eurozone composite PMI, eurozone retail sales, US services PMI, US composite PMI, US oil inventory data
Thursday
- Earnings Expected From: American Eagle Outfitters, Inc. AEO, Barnes & Noble, Inc. BKS, Dollar General Corporation DG, Finisar Corporation FNSR, Kroger Company KR, Ulta Salon Cosmetics & Fragrance, Inc. ULTA, UTi Worldwide Inc. UTIW
- Economic Releases Expected: Bank of England interest rate decision, European Central Bank interest rate decision
Friday
- Earnings Expected From: 1-800 FLOWERS.COM. Inc. FLWS, Bank of Nova Scotia BNS
- Economic Releases Expected: eurozone GDP, US non-farm payrolls data, US unemployment rate, US trade balance, US factory orders, US consumer credit
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