Home Depot posts worst revenue miss in about 20 years

Local Market Update

At the close of trading, the Johannesburg Stock Exchange experienced a decline, with both the Top-40 index, consisting of blue-chip stocks, and the All-Share index closing approximately 0.4% lower (now at 77,973 index points). This downward trend coincided with the release of Statistics South Africa's latest unemployment data for the January-March period, revealing a rise in unemployment to 32.9% compared to the previous quarter's 32.7%. Additionally, Eskom, the struggling state power utility, is currently implementing record-breaking rolling blackouts, resulting in businesses and households enduring up to 10 hours of power outages per day. These blackouts are significantly impacting the economy, with JP Morgan predicting a contraction of 0.2% in South African economic output this year as a direct consequence.

European Market Update

European stock markets concluded the day with losses as traders responded to fresh data. Surprising UK jobless data, indicating a slight increase, helped alleviate concerns about inflation. Additionally, EU employment figures showed a quarterly rise of 0.6%. In individual stock news, Vodafone shares declined by 7% following its announcement of cutting a record 11,000 jobs. CEO Margherita Della Valle emphasized the need for change within the British telecommunications company. Shares of Swedish gaming firm Embracer experienced a significant drop of 17% after the company stated that its full-year profit would fall short of previous guidance. Embracer revised its adjusted operating profit forecast to 6.35 billion Swedish krona ($625.5 million), down from the previously estimated range of 8-10 billion krona. The adjustment was attributed to partnership and licensing deals not materializing as anticipated.

US Market Update

US stocks dipped Tuesday as investors digested a lacklustre forecast from Home Depot. Wall Street also turned its attention to a meeting between congressional leaders and President Joe Biden on the US debt ceiling. April retail sales came in weaker than expected, rising 0.4% last month. That was lower than the 0.8% increase anticipated by economists polled by Dow Jones. Dow member Home Depot pulled back by 2.15% after the retailer reported disappointing quarterly revenue and cut its full-year guidance, as consumers postponed large home improvement projects. Investors are anxiously awaiting progress on debt ceiling negotiations.

Asia Market Update

Asia-Pacific markets are exhibiting a mixed trading pattern as investors analyse economic data releases from Japan and Australia. The planned meeting of Quad leaders in Sydney next week has been cancelled, with US President Joe Biden shortening his Asia trip to return to the US for discussions on the debt ceiling. Australia was scheduled to host the Quad Leaders' Summit on May 24, which would have included the US, India, and Japan. In other news, Singapore's non-oil domestic exports in April surpassed expectations by growing 2.7% compared to the previous month. Economists surveyed by Reuters had anticipated a contraction of 3%. However, on a year-on-year basis, non-oil domestic exports declined by 9.8%, slightly more than the economists' projection of 9.4%.

Commodity Market Update

Gold prices stabilized below the $2,000 threshold on Wednesday as investors expressed concern about the outcome of the US debt-limit negotiations. The stronger US dollar acted as a limiting factor, preventing prices from rising further. Meanwhile, oil prices showed minimal movement as traders maintained a cautious stance following an unexpected increase in US crude inventories. This development raised worries about demand in light of disappointing economic data from both the United States and China. According to market sources citing figures from the American Petroleum Institute, US crude stockpiles grew by approximately 3.6 million barrels in the week ending May 12. This contrasted with the expectations of a 900,000 barrel decrease predicted by seven analysts surveyed by Reuters.

Currency Market Update

On Tuesday, the South African rand weakened following the release of first-quarter unemployment data, which provided insight into the state of the local economy after a turbulent week in the markets. By the end of the day, the rand was trading at around R19.10 against the dollar, reflecting a 0.37% depreciation. In contrast, the dollar strengthened on Wednesday due to increased safe-haven demand as the United States approached its borrowing limit. Furthermore, solid economic data led traders to scale back expectations of imminent interest rate cuts. President Joe Biden and top congressional Republican Kevin McCarthy moved closer to reaching a deal to avert a US debt default. However, the situation remains uncertain, and ironically, the risk of the US failing to meet its debt obligations has bolstered the value of the currency.

REUNERT LIMITED (RLO) 4.1%

Reunert anticipates a significant improvement in its financial performance for the period ending on March 31, 2023, compared to the previous year. This positive outcome can be attributed to the exceptional operational performances of the Electrical Engineering and Applied Electronics Segments, driven by increased demand for their products and services. The projected earnings per share ("EPS") range between 249.2 cents and 268.8 cents, representing a growth of 27.1% to 37.1% compared to the previous year's EPS of 196.0 cents. Similarly, the estimated headline earnings per share ("HEPS") fall between 257.3 cents and 276.8 cents, reflecting an increase of 31.9% to 41.9% in comparison to the prior comparative period's HEPS of 195.0 cents.

THARISA PLC (THA) -8.0%

Tharisa anticipates that its headline earnings per share ("HEPS") for the six months ending on March 31, 2023, will range between US 17 cents and US 18 cents per share, with a tolerance of 10%. This represents an increase of 9.6% to 16.1% compared to the HEPS of US 15.5 cents per share recorded in the corresponding period of the previous year. For the same period, Tharisa's basic earnings per share ("EPS") are projected to fall between US 17 cents and US 18 cents per share, with a tolerance of 10%. This indicates a decrease of 44.9% to 48.0% relative to the EPS of US 32.7 cents per share reported in the six months ending on March 31, 2022. It's important to note that the prior year's EPS included a one-time item related to the accounting treatment of the acquisition of a controlling interest in Karo Mining Holdings Limited as a "business combination."

SANTAM LIMITED (SNT) -0.2%

Santam has made adjustments to its reporting practices to align with evolving stakeholder needs. Instead of providing trading results for the four months to April and ten months to October, they will now cover the three months ending on March 31 and nine months ending on September 30, respectively. The adoption of the IFRS 17 Insurance Contracts standard from January 1, 2023, will result in restated comparatives for the 2022 financial period, although the impact on reported results is not considered significant. During the period, Santam faced challenging operating conditions influenced by factors such as electricity supply disruptions, which impacted economic growth, elevated inflation affecting personal disposable income, and higher interest rates. Additionally, the insurance market in South Africa remained highly competitive. Underwriting conditions were characterized by adverse claims experience, particularly from inclement weather conditions and ongoing power surge claims affecting property-related business. Despite these challenges, Santam's Client Solutions and Broker Solutions businesses achieved positive growth in gross written premiums, driven by both intermediated and direct channels. Actions taken to address high claims inflation and frequency are producing favorable outcomes during policy renewals, with the full impact expected to be realized by the latter part of 2023. The Santam Specialist Solutions business experienced strong growth in gross written premiums, primarily driven by liability, marine, aviation, and travel segments. However, MiWay faced subdued gross written premium growth due to market pressures and intense competition. Nevertheless, progress is being made with the implementation of strategic growth initiatives that are expected to accelerate growth in the future. Santam Re reported steady growth in gross written premiums, benefiting from an overall increase in reinsurance rates worldwide. However, the cancellation of loss-making business tempered this growth. Santam received approval from the Competition Tribunal to acquire the MTN device insurance book in South Africa, as part of its strategic alliance with MTN through aYo Holdings Limited. This transaction is expected to contribute to underwriting profit and align with Santam's capital requirements. In terms of capital cover, the Group's economic capital position remained within the target band of 145% to 165% following the final dividend payment in March 2023. Santam implemented a new operating model from January 2023 to ensure the optimal execution of its FutureFit strategy in the current and medium-term environment. This model emphasizes adapting to evolving client needs, behaviors, and technologies, leveraging data and a focused multi-channel approach, ecosystem adjacencies, and strategic partnerships. Santam continues to pursue its international strategy, leveraging its expertise in specialist and reinsurance businesses. The operating conditions are expected to remain challenging, exacerbated by increased loadshedding. However, the company's strong foundation, refreshed strategy, and new operating model will enable them to confront these challenges and deliver superior results.

HOME DEPOT (HD) -2.2%

Home Depot reported its largest revenue miss in over 20 years and revised its forecast for the year, citing consumer delays in large projects and reduced purchases of high-ticket items like patio sets and grills. The home improvement retailer attributed the decline in fiscal first-quarter sales to cold weather and decreasing lumber prices. This quarter marked the first significant revenue miss since November 2002. Home Depot now expects a sales and comparable sales decline of 2% to 5% for the fiscal year, compared to its previous prediction of flat sales for the period. The operating margin rate is also anticipated to be lower, ranging from 14% to 14.3% for the year, including the impact of a $1 billion investment in employee wages. In the fiscal first quarter, Home Depot's net income was $3.87 billion, or $3.82 per share, representing an 8.5% decrease from $4.23 billion, or $4.09 per share, in the previous year. Revenue declined by 4.2% to $37.26 billion from $38.91 billion. This marked the second consecutive quarter where Home Depot fell short of Wall Street's revenue expectations. Comparable sales for the first quarter dropped by 4.5%, with a 4.6% decrease in the United States. The decline in lumber prices accounted for over 2 percentage points of the decrease. While sales among do-it-yourself customers showed more favorable trends compared to home professionals, both groups experienced a year-over-year sales decline, as highlighted by CEO Ted Decker during an earnings call. Despite the challenges, Home Depot benefits from low housing supply and an aging housing stock in the US, factors that continue to drive demand for home improvement. Some categories, including building materials, hardware, plumbing, and millwork, saw year-over-year sales growth, indicating ongoing investments in homes. CEO Ted Decker expressed confidence in the medium to long-term prospects of the home improvement industry once the current period passes, emphasizing its strong fundamentals.

WORLD WRESTLING ENTERTAINMENT (WWE) 1.5%

Last month, World Wrestling Entertainment (WWE) and Endeavor's UFC announced their plans to merge later this year. The combined company now has a name. According to a spokesperson from Endeavor, the new entity will be known as TKO Group Holdings. As previously stated, it will be listed on the New York Stock Exchange under the ticker symbol TKO. The name "TKO" is a nod to the "technical knockout" term commonly used in professional fighting. The merger aims to create a sports entertainment powerhouse valued at over $20 billion. Ari Emanuel, CEO of Endeavor, will assume the role of CEO for TKO Group, while Vince McMahon, WWE's controlling shareholder and long-standing leader, will serve as the executive chairman of the new company. Endeavor will hold a 51% stake, with WWE shareholders retaining the remaining 49%. Emanuel has expressed his intention to employ the same successful strategies with WWE that Endeavor implemented with UFC, resulting in a 20% revenue surge between 2021 and 2022.

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