Commencing the Quarter – Q4’23

Easing Inflation and Related Interest Rate Forecasts Drive Confidence, Though Executives Toeing the Line of Optimism with a More Positive But Careful Tone; Tangible Gains Not Anticipated Until “Later”

• MillerKnoll (FY Q2’24 – $1.9B, Consumer Cyclical, Furnishings, Fixtures & Appliances): “While we faced relatively high interest rates and geopolitical concerns, positive signs are emerging throughout our industry. Metrics such as project funnel activity, order intake and recent measures of dealer optimism reflect that CEO confidence is improving.”
• Jabil (FY Q1’24 – $16.1B, Technology, Electronic Components): “Expect some level of enterprise-level spend to improve. A lot of CFOs have been pulling back on enterprise-level purchases. With interest rates going down, the whole macro environment changes in that perspective. So, we do now expect it to have an impact on other end markets. Will it happen immediately? Probably not. But over time, it will have a positive impact for us and for almost every other company as well.”
• FactSet Research Systems (FY Q1’24 – $17.4B, Financial Services, Financial Data & Stock Exchange): “Inflation has eased but remains higher than the Fed’s 2% target. Equities have rallied on the news as rates fell across the yield curve. While this news was helpful, it will take time for capital markets and deal activity to pick up. We expect that market recovery will come later than we anticipated in our September fiscal year 2024 guidance.”
• Apogee Enterprises (FY Q3’24 – $1.2B, Industrials, Building Products & Equipment): “If interest rate outlooks begin to improve in calendar 2024, that could favorably impact our business. However, with the longer cycle nature of the construction industry, we would not expect a significant impact on our fiscal 2025 results.”
• Micron Technologies (FY Q1’24 – $91.3B, Technology, Semiconductors): “We expect 2024 to be a year of recovery and can see the path towards a healthy supply/demand environment.”
• Conagra (FY Q2’24 – $13.7B, Consumer Defensive, Packaged Foods): “The goal at this juncture is to build momentum, move the volumes back toward growth as we approach fiscal 2025 and make sure that we deliver along the way without signing up for anything heroic. And that best describes where we are.”

Challenges Persist as Consumer Softness and “Value-Seeking Behavior” Inhibit Volume Recovery Across Sectors, Though Hopeful Signs Emerge for Future Normalization

• NIKE (FY Q2’24 – $155.7B, Consumer Cyclical, Footwear & Accessories): “Total retail sales across the marketplace fell short of our expectations with softer demand outside of the key consumer moments. While NIKE’s store traffic continued to grow, we saw softness in digital traffic and higher levels of promotional activity across the marketplace.”
• General Mills (FY Q2’24 – $37.3B, Consumer Defensive, Packaged Foods): “While many factors have evolved in line with our expectations, including moderating levels of input cost inflation and price/mix, as well as the return toward historical price elasticities, we are seeing consumers continue to display stronger than anticipated value-seeking behaviors across our key markets. And this dynamic is delaying volume recovery in our categories.“
• Walgreens Boots Alliance (FY Q1’24 – $20.9B, Healthcare, Pharmaceutical Retailers): “Retail customers in the U.S. are under stress and making deliberate choices to seek value, evidenced in our own brands up 90 bps in the quarter, while demand for seasonal and discretionary categories remains weak.”
• Conagra (FY Q2’24 – $13.7B, Consumer Defensive, Packaged Foods): “At a macro level, the industry-wide shifts in U.S. consumer behavior that we discussed on last quarter’s call persisted into the second quarter. These behavior shifts continued to pressure volume and mix. However, while the consumer is still deploying some value-seeking tactics when they shop, we are seeing clear progress when it comes to volume recovery.”
• Worthington Enterprises (FY Q2’24 – $2.7B, Industrials, Metal Fabrication): “We’re not totally through the woods if the consumer is not back to spending the way that they were in 2021 and 2022. But we do expect to see more seasonally normal trends.”

Execs Continue to Navigate Residual Waves of Inflation; However, “Stable” Macro Conditions are Contributing to Moderated Impacts Overall

• General Mills (FY Q2’24 – $37.9B, Consumer Staples, Packaged Foods): “I would tell you that neither we nor consumers have seen inflation the way we’ve seen it over the last few years, and consumers are still getting used to new prices in the marketplace. It’ll take a little while for consumers to settle into what new price points are, to the extent we continue to see inflation…even if at more modest levels.”
• Cintas (FY Q2’24 – $59.0B, Industrials, Specialty Business Services): “We’re seeing what you’re seeing with overall inflation. We’re seeing that come down. It’s not coming down as fast as we’d like, but we are seeing it.”
• Darden Restaurants (FY Q2’24 – $19.3B, Consumer Cyclical, Restaurants): “If you go back to the time to when we provided our original guidance… we thought if things slowed down a little bit, we should expect the inflation environment to improve a little bit. Halfway through our fiscal year, that’s really the dynamic we’re seeing. We’ve seen some [dining] check softness that’s being offset by lower inflation, which is why we went to the lower end of our sales range while increasing our earnings outlook.”
• Lamb Weston Holdings (FY Q2’24 – $15.3B, Consumer Defensive, Packaged Foods): “Global demand is resilient as consumers continue to face food-away-from-home inflation. Price and mix trends in the U.S. and most of our key international markets remain solid while input cost inflation is decelerating.”
• Paychex (FY Q2’24 – $42.2B, Industrials, Staffing & Employment Services): “Our Small Business Employment Watch continues to show moderation in both job growth and wage inflation which is indicative of a stable macro environment and that the actions taken by the Fed are having their desired impact.”

In Line with Our Earnings Primer^® Findings, Conservativeness Continues to Abound as Debt Reduction Remains a Core Focus; However, the Sun is Beginning to Peak Through the Clouds of the Deal Environment, and Executives Report Looking for Opportunities

Debt Paydown

• Cooper Companies (FY Q4’23 – $18.1B, Healthcare, Medical Instruments & Supplies):“I would say on capital allocation, our focus frankly is on paying down debt right now. We’ll continue to do the things we do, but we’ll have a heavier focus on paying down debt.”
• Conagra Brands (FY Q2’24 – $13.7B, Consumer Defensive, Packaged Foods): “Looking ahead to the remainder of fiscal 2024, we expect to continue our debt reduction efforts as we prioritize our long-term leverage target of 3.0x. We chose not to repurchase any shares in the quarter, as we continue to prioritize paying down debt this fiscal year.”
• WD-40 (FY Q1’24 – $3.6B, Basic Materials, Specialty Chemicals): “Going forward, our objective is to return cash to investors in the most accretive manner. Higher interest rates may mean share buybacks are not as accretive as they were in the past. Our intent is to continue to pay down higher interest borrowings under the current interest rate environment.”

M&A

• RPM International (FY Q2’24 – $13.4B, Basic Materials, Specialty Chemicals):“We regularly look at opportunities to divest. And as you all know, the M&A market’s been pretty dead. Whether it’s on the buy-side or sell-side, we’ll have to see interest rates come down and M&A activity and valuations come back up.”
• Winnebago Industries (FY Q1’24 – $2.0B, Consumer Cyclical, Recreational Vehicles): “The M&A environment has continued to come off the dislocation that we’ve seen over the past couple of years. As you can appreciate, at the peak, companies in our space wanted to sell off that peak with very high prices and then you hit a trough and then companies wanted to sell on a forward view. It’s hard to find that price that both buyers and sellers can agree to. As we start to see some normalization on retail and get a clearer view of the year ahead and what the right multiple would be to pay, we’ll see some better M&A environments.”
• Apogee Enterprises (FY Q3’24 – $1.2B, Industrials, Building Products & Equipment): “The recent Fed signaling of a hold and now a likely softening of interest rates could enable a shorter and shallower downturn for commercial construction. It should also loosen what has been a tight market for M&A, providing more opportunities for us to make strategic, financially accretive acquisitions to strengthen our portfolio and provide a catalyst for growth.”
• Cintas (FY Q2’24 – $59.0B, Industrials, Specialty Business Services): “We’re being really good fiduciaries of our shareholders’ investments… and the net of that is we still have great dry powder, which allows us to take on M&A of all shapes and sizes, and we’re interested in that.”

From Semiconductors to Restaurants, Staffing to Cars, AI is Transforming the Business Environment, and Companies are Quick to Tout the Benefits of Current and Anticipated AI Projects

• Micron Technologies (FY Q1’24 – $91.3B, Technology, Semiconductors): “We are in the very early stages of a multi-year growth phase catalyzed and driven by generative AI, and this disruptive technology will eventually transform every aspect of business and society. Memory is at the heart of GPU-enabled AI servers, and we are already seeing strong demand driven by early deployment of AI solutions, which will only accelerate over time.”
• Paychex (FY Q2’24 – $42.4B, Industrials, Staffing & Employment Services): “We’re doing a lot of using AI and our data… we’re building AI models, starting to use that in the mid-market, that actually then gives our sales reps, in real time based upon numerous factors, what price and what level of discounting we would allow for a particular client…”
• Darden Restaurants (FY Q2’24 – $19.4B, Consumer Cyclical, Restaurants): “We’ve had a history of discipline and improvement in productivity enhancements. This year is no different. I would also say our teams continue to get better with forecasting our business. We’ve added some AI tools to their tool belt to be able to forecast their restaurant business by 15-minute increments, even better than they did before.”
• MillerKnoll (FY Q2’24 – $1.9B, Consumer Cyclical, Furnishings, Fixtures & Appliances): “We continue to expand our e-commerce business and enhance AI and visualization tools in order to enhance conversion. Throughout this quarter, we continue to innovate and reimagine our product portfolio.”
• CarMax (FY Q3’24 – $11.4B, Consumer Cyclical, Auto & Truck Dealerships): “We have to separate AI versus generative AI because AI has been around a long time. We’ve been leveraging it for a long time in a lot of different aspects of the business. We’re leveraging [it] in our creative. We’re leveraging [it] in our coding. We’re working on some generative AI assistants on a knowledge base for our CECs, which we think is going to be really powerful. We’re leveraging it on a conversational search. We’ve got some tests going on right now where instead of typing in key search things, we can actually do conversational search with consumer.”

Varied Perspectives Provided for Both Regions on a Company by Company Basis, with Some Pointing to Gradual Signs of Improvement and Others Pointing to Continued Headwinds

• MillerKnoll (FY Q2’24 – $1.9B, Consumer Cyclical, Furnishings, Fixtures & Appliances): “Globally, we continue to see strength in the Middle East. We continue to see strength in India. We’re seeing China sort of slowly come back, which is encouraging. And then, I think Europe is starting to feel a little bit better than it had. So internationally, we have markets that are definitely seeing strength.”
• Nike (FY Q2’24 – $155.7B, Consumer Cyclical, Footwear & Accessories): “Overall, we’ve taken a more prudent approach to our planning for the balance of the year, given the increased macro headwinds we’re seeing in China and EMEA in particular, and the way that we’ve adjusted our digital growth downward based on the traffic softness that we’ve seen and the higher marketplace promotions.”
• Lamb Weston Holdings (FY Q2’24 – $15.3B, Consumer Defensive, Packaged Foods): “As we stated earlier, China is growing at double digits [in terms of restaurant traffic], and we’re well positioned. We just opened up our second factory over there. It’s up and running and operating. There’s a lot of news feed on China and the economy and all that’s going on. But in terms of the category, we feel good about where that’s at based on the data we look at, which is telling us it’s growing double digits. We’ve got our plant up and coming. We’ve got line of sight to how we’re going to look at that market and potential customers that we can support. But, as we go through this contracting season in that international market, we’re well positioned to gain some business.”
• WD-40 (FY Q1’24 – $3.6B, Basic Materials, Specialty Chemicals): “The next biggest piece of our business to recover is EMEA. You saw some recovery in the second half in terms of volumes, but we now expect those in FY 2024 to become positive, maybe not out of the gate. But over time, they will build. And we’re already seeing patches in our September results from the new fiscal year where we have pockets of really outstanding volume recovery in Europe as well.”
• RPM International (FY Q2’24 – $13.4B, Basic Materials, Specialty Chemicals):“In Europe, we had a pretty strong performance in the quarter. The UK was the first of the major markets that we’re involved in that really went into a recession. And so it feels like there’s some spending activity there. But, I would say Continental Europe is not economically doing particularly well.
• Jabil (FY Q1’24 – $16.1B, Technology, Electronic Components): “I’ve been in Europe and in Asia over the last month meeting a lot of our customers. The feedback is we expect the next couple of quarters to be inventory correction, and we think beyond that, we’re in decent shape. And we’ve backed that into what we see for the back half of the year.”

Impacts of Recent Freight Turmoil in the Red Sea are Beginning to Bubble Up into Earnings Commentary; Executives Already Pointing to Disruption and Increased Costs

• Acuity Brands (FY Q1’24 – $6.9B, Industrials, Electronic Equipment & Parts): “Regarding costs moderating, there are some obvious post-pandemic costs which have changed, like steel, containers, etc. But it’s worth calling out containers as an example, because now we’re dealing with the Red Sea challenges, container costs that were about $3,000 per container can now rise as much as $6,000 per container. With that in context, at the peak, those were in the $20,000 per container rate, so that gives you an idea of kind of where those differences are. We have a plan to deal with those higher container costs for the remainder of the year.”
• Mueller Water Products (FY Q1’24 – $2.2B, Industrials, Specialty Industrial Machinery): “Looking ahead, we believe there remains a meaningful level of uncertainty in the macroeconomic environment with our end users as they continue to adjust to higher interest rates and elevated project costs. We also anticipate that the Israel-Hamas war will create headwinds for the global supply chain. Due to the extent of the war, we have made incremental operational investments to continue to help ensure we meet customer demand. The cost of these investments will impact the company’s first quarter results and are likely to continue for the foreseeable future.”
• Quanex Building Products Corporation (FY Q1’24 – $1.0B, Industrials, Building Products & Equipment): “The devastating war in Ukraine continued to negatively impact consumer confidence in Europe and added unknown risks to energy costs for the winter months. In addition, we now have the war in Gaza, which, again, has the potential to disrupt markets, energy costs, and global freight channels.”