Commencing the Quarter – Q3’24

Largely Cautious Tone Amid Continued Macro Uncertainty, While the Q2 Trend of Lowering Guidance Continues

• KB Homes ($6.3B, Consumer Cyclical, Residential Construction): “Given where we’re at today economically, and particularly with some of the uncertainty around what the Fed actions will be for the rest of the year, the election results, the macroeconomic, geopolitical, etc., we decided to keep it very high level and keep our guidance really only to that top line number…we’re going to wait until we come back to you guys in January and discuss all of our key metrics and guidance and expectations at that point in time like we normally do.”
• Jabil ($13.5B, Technology, Electronic Components): “We have learned from our lessons from last year and the second half that we have put in here is relatively book business. There’s no assumptions of a huge recovery in the end market. It’s based off of seasonality. It’s based off of our regular wins that we have. Some of the wins take a little bit longer than others. There’s multiple ramps going on. So, I feel good about the second half of the year. There’s nothing in there that would suggest that there’s some level of optimism there. It’s a pretty conservative number as well.”
• Worthington Steel ($1.7B, Basic Materials, Steel): “We would describe the market as solid. Automotive is [solid] despite the small setback last quarter. Ultimately, the year is going to be relatively flat at about 15.6 million units. When it comes to other important markets for us, the construction market, which is, very large and very diverse for us. We’re cautiously optimistic about going into calendar 2025. We expect that the cut in interest rates likely to have a positive impact there.The ag market expected to be muted for the rest of the calendar year, came off a really strong 2023, but they continue to face challenges here with lower commodity prices this year, higher interest rates and higher input costs.”

Lower Interest Rates

• KB Homes ($6.3B, Consumer Cyclical, Residential Construction): “Although traffic increased 8% YoY, some buyers hesitated on their purchase decision due to concerns about transacting too early given the uncertainty around interest rates and news headlines fueling an expectation of interest rate cuts by the Federal Reserve. Ultimately, lower mortgage rates do help to stimulate demand and we saw evidence of this in August, with net orders increasing sequentially week by week as the month progressed.”
• MillerKnoll ($6.7B, Consumer Cyclical, Furnishings, Fixtures & Appliances): “Work is underway now to begin opening several new stores in the second half of fiscal year 2025, with plans for more stores in fiscal year 2026. Now that interest rates have dropped slightly, we anticipate that customers and trade partners will start placing the orders they’ve paused. We’ve invested in marketing to capture their attention and to support the upcoming cyber and holiday season.”
• Concentrix ($3.3B, Technology, Information Technology Services): “The interest rates have not had, frankly, any impact as we would have liked to have seen in it…we have not seen a step-up change in the large pure IP digital transformation projects that we’ve talked about in the past because of interest rates coming down.” 

Guidance

• FedEx ($65.9B, Industrials, Integrated Freight & Logistics): “Looking at FY 2025, we now expect revenue to grow at low single-digit rate. We previously expected low to mid-single-digit revenue growth this fiscal year. At the midpoint of our outlook range, we expect the demand environment to moderately improve as we move through the year driven by slight recovery in the industrial economy, e-commerce growth, and low inventory levels. We anticipate some improvement in the pricing environment skewed toward the second half of the fiscal year.”
• H.B. Fuller Company ($4.2B, Basic Materials, Specialty Chemicals): “As a result of our YTD performance and current macroeconomic conditions, we are updating our previously communicated financial guidance for fiscal 2024 as follows. Net revenue growth is now expected to be up a ~2% with organic revenue flat YoY. Adjusted EBITDA is now expected to be in the range of $610M to $620M, equating to growth of between 5% and 7% YoY. This compares to our original full year guidance range of $610M to $640M.”
• Concentrix ($3.3B, Technology, Information Technology Services): “We are operating in a very dynamic environment and we’re investing to grow over the long term. From a revenue perspective, while we came in above the midpoint of our guidance in the third quarter, we now expect a slower growth rate in the fourth quarter than we had expected previously. This reflects three factors in the following order in terms of significance: lower volume forecast from some clients in the third quarter, as a result of lower underlying transaction volumes and automation; a larger shift of revenue to lower cost delivery geographies than expected; and the loss of some commoditized projects that we have chosen to walk away from overprice.”
• Nike ($123.2B, Consumer, Footwear & Accessories): “Looking forward, our revenue expectations have moderated since the start of the year, given traffic trends on Nike Digital, retail sales trends across the marketplace, and final order books for spring.”

Strong AI and Data-Driven Appetite Face Supply Constraints; Despite Interest Rate Relief, Views Trend More Moderate/Muted Across the Landscape

• Micron Technology ($106.2B, Technology, Semiconductors): “In terms of demand, the strength in the data center is driving upside to what we had priorly communicated. And we continue to see really strong demand from the data center. The demand is coming from both the cloud and enterprise AI servers, as well as traditional server origin. We have seen very high demand for our product, and we feel confident that we’ll be able to ramp. All of the ramp that we have for 2025 is really limited by the supply and the rate and pace at which it can be brought to market, because we definitely have a lot of demand for this industry-leading product.”
• Concentrix ($3.3B, Technology, Information Technology Services): “What we see is just in the underlying volumes, particularly around consumer technology, whether that and consumer electronics, we’re just seeing very, very muted volumes there. And so we’re gaining share but we’re not in the process of share gaining much in the way of revenue. The great news is as we gain share, hopefully over time, the macro improves and people stop sweating their tech and go through refresh cycles, we should see transaction volumes pick up there, hopefully, and then we’ll be well-positioned to return to faster growth there, as we’ve seen in the past. Right now, doing great from a share gain perspective but the underlying volumes just aren’t there.”
• MillerKnoll ($6.7B, Consumer Cyclical, Furnishings, Fixtures & Appliances): “We’re feeling optimistic about the outlook for retail as it pertains to our demand trend. We think the 0.5-point cut yesterday is really going to help stimulate a little bit more confidence in the consumer that we approach on a daily basis.”
• Cintas Corp ($81.6B, Industrials, Specialty Business Services): “We have not seen much change in the customer behavior. It’s just 60 days ago that we reported our full fiscal year 2024 earnings, but we haven’t seen much change. We still see nice demand from our customers.”
• RH ($6.2B, Consumer Cyclical, Specialty Retail): “Despite expectations for industry conditions to remain challenging until interest rates ease and the housing market begins to rebound, we expect our demand trends to accelerate throughout 2024 and into 2025.”

Prioritizing Growth

• McCormick & Co ($22.4B, Consumer Defensive, Packaged Foods): “Our [2024] outlook continues to reflect our prioritized investments in key categories to strengthen volume trends and drive long-term, sustainable growth, while appreciating the uncertainty of the consumer environment.”
• FactSet Research Systems ($17.4B, Financial Services, Financial Data & Stock Exchanges): “Our deliberate expense management is positioning FactSet for future growth by allowing us to self-fund additional investments in technology and strategic initiatives in fiscal year 2025.”

Amid a Backdrop of Cooling Costs and a More Stable Price Environment, Execs Tout Steps to Drive Profitability, Controlling the Controllables

• Kroger Co ($40.9B, Consumer Defensive, Grocery Stores): “As we innovate within the portfolio and expand to meet customer needs, we are improving our mix and driving better profitability. For example, our manufacturing plants allow us to make many of our own products, keeping costs lower as we pass those savings on to customers, while preserving our ability to grow margins.”
• Cintas Corp ($81.6B, Industrials, Specialty Business Services): “Material cost has been trending nicely, and we work hard at that material cost. So, within there, you can think about our global supply chain and finding better ways to source, better cost of product. The other thing that we really work hard at is in our stockrooms and the sharing of garments. So, the combination of those things have created some nice tailwind, and you see that showing up in our gross margin. We would expect that will continue through the fiscal year.”
• Levi Strauss & Co ($8.3B, Consumer Cyclical, Apparel Manufacturing): “We’ve got this laser focus on growing gross profit dollars faster than SG&A. And what it really does is increases the flow through for every incremental dollar revenue that we add to our business. We’ve seen the progress across the board, and I think that is the one metric that will really help us get to the 15% operating margin that we are talking about.”

Inflation

• Costco Wholesale ($395.3B, Consumer Defensive, Discount Stores):“We shared for the quarter overall inflation was essentially flat. We saw a little bit of inflation in fresh that was mainly driven by produce right now. That was sort of the key category there that drove but again very low inflation. Nothing meaningful to talk about. I wouldn’t say that we’re seeing anything dramatically different from how our quarter looked for this quarter. But of course, we’re like everybody we’re susceptible to shocks and changes that can happen in the market.”
• Kroger Co ($40.9B, Consumer Defensive, Grocery Stores): “You’re always trying to balance all the pieces. Part of the PPI is certain parts of it are commodity driven. If we think something is a permanent cost increase, then we try to pass that along as fast as we can. If it’s a short-term blip, then we’ll manage that based on what’s going on in the market. And it’s as difficult now estimating where inflation is going to be as probably any period of time, but we are seeing it being reasonably stable.”
• AutoZone ($51.9B, Consumer Cyclical, Specialty Retail): “This quarter, inflation on a like-for-like SKU basis was essentially flat, which drove flat pricing and average ticket for commercial. We have seen pricing remain relatively flat as inflation has cooled for goods in our industry.”

Execs Highlight an Even More Cautious Consumer Amid Strained Budgets and Elevated Prices; Spending Remains Focused on Essentials and Value, though Lower Interest Rates Offer Hope for Improved Confidence

• United Natural Foods ($1.2B, Consumer Defensive, Food Distribution): “The consumer is, very price sensitive. We’re working very hard to give our customers the tools to appeal to the customer where they are. But our outlook is balanced in the environment that it’s in. Inflation has lowered down from a percentage growth standpoint, but prices are still high, value is still important.”
• Costco Wholesale ($395.3B, Consumer Defensive, Discount Stores): “I would say we’ve certainly seen a continued acceleration in some of those lower cost protein items like poultry, cheaper cuts of beef like ground beef and pork. So there’s definitely some signs that the consumer is being very choiceful in how they’re spending their dollars.”
• McCormick & Co ($22.5B, Consumer Defensive, Packaged Foods): “Overall, consumers are resilient but remain challenged. They are exhibiting value-seeking behavior making more frequent trips to the grocery store with smaller baskets and shopping just for what they need. They are also focused on reducing waste and stretching their budgets.”
• Academy Sports and Outdoors ($3.8B, Consumer Cyclical, Specialty Retail): “The active young families that we primarily serve remain under financial pressure. They’re struggling with reduced spending power, driven by price inflation, coupled with higher credit card debt and delinquencies, both of which remain well above pre-pandemic levels. We continue to see these factors constrain household spending on discretionary goods in the near term.”
• Kroger Co ($40.9B, Consumer Defensive, Grocery Stores): “Customers continue adjusting to the current economic environment. The reduction of excess savings built up during the pandemic, higher interest rates, and the effect of inflation are pressuring customers’ ability to spend. This is especially true for our most budget-conscious customers, as we’ve been seeing for a while now. But we’re now seeing other customer segments beginning to make changes as well. Customers are purchasing lower-priced cuts of meat, buying less and focusing on essentials. Budget-conscious customers are buying more at the beginning of the month to stock up on essential items and groceries; and then as the month progresses, they are more cautious with their spending.”
• Lennar ($50.9B, Consumer Cyclical, Residential Construction): “Across the business landscape, narratives around challenged consumer confidence have tempered earnings calls. Lower rates and controlled inflation will likely boost that confidence. Consumers remain employed, they are generally confident that they will remain employed, and they generally believe that their compensation will rise. We believe that while confidence will ebb and flow, lower rates will stabilize confidence and the consumer will prioritize shelter and purchase as affordability enables them to do so. We fully expect an even stronger and more broad-based demand cycle as rates move lower.”
• Worthington Enterprises ($2.1B, Industrials, Metal Fabrication): “[Regarding consumer confidence] a 50 bps decline in interest rates, that’s a step in the right direction and so as interest rates decline, worst case, that’s a neutral for our consumer business, more likely case it ultimately starts to influence people’s mobility, right? People do repair, remodel projects most frequently when they’re getting ready to sell their house or when they first move into their house. And so, the lower interest rates will be a good guide, for a lot of reasons and certainly we will benefit there.”

Companies Highlight Proactive Steps Taken to Manage Potential Disruptions Related to East and Gulf Coast Strike

• Costco Wholesale ($395.3B, Consumer Defensive, Discount Stores): “The port strike is something we’ve been watching very closely for some time. We’ve got contingency plans. We’ve cleared the ports. We’ve pre-shipped. We’ve done several different things that we could to get holiday goods in ahead of this timeframe and looked at alternate plans that we could execute with moving goods to different ports and coming across the country if needed. We’ve taken as many preemptive measures as we could to prepare for this.”
• McCormick & Co ($22.5B, Consumer Defensive, Packaged Foods): “On the East Coast port strike, from an inbound supply planning perspective for us, we’ve been contingency planning on this on the potential for this since April of this year. We really have been thinking about this as maybe something that could happen. And so we’ve been planning our actions around that possibility. We’ve also coordinated mitigation plans with our domestic suppliers because they might be counting on inbound supply coming from outside the United States. So we believe we’ve mitigated most of those risks with the strike now officially occurring.”
• Oxford Industries ($1.3B, Consumer Cyclical, Apparel Manufacturing): “We built in about 15 bps to 20 bps in margin hit due to elevated freight. So it’s not a huge amount. We are watching and that’s mainly some of the Red Sea issues that have inflated rates. We are watching closely the East Coast situation with the union negotiations and are diverting some product to the West Coast and then we’ll have to bring it across the country in some cases. We have built in some disruption from that.”
• Levi Strauss & Co ($8.3B, Consumer Cyclical, Apparel Manufacturing): “On the port strike…we are doing everything we can to prepare ourselves and as much as we can. We’ve been working on this for the last couple of months. We’ve been proactively working on it through as early as March and we’ve been monitoring the situation closely. For example, [we] proactively shipped routes to the West Coast. We’ve prioritized certain POs and switched to airfreight just to ensure that we have the product for the holiday season, etc.”

Election-Related Uncertainty Continues to Serve as a Headwind; Tax and Tariffs Are Top of Mind

• Jabil ($13.5B, Technology, Electronic Components): “There is a little bit of a wait-and-see approach, particularly as it relates to some of the end markets. I think most end markets are okay. Ones that stand out obviously are EVs and renewables. There is a little bit of a wait-and-see. I do think whichever party comes in, I feel good that we’ll have a long-term growth driver in both EVs and renewables. I’m not that worried about the election per se. Obviously, there’ll be short-term impact, but Jabil has mitigated most of that.”
• RPM International ($16.4B, Basic Materials, Specialty Chemicals): “[Regarding infrastructure spend] I think they’re committed dollars. It’s anybody’s guess as to what happens based on who wins. But the Biden administration will be committed to seeing through successfully their Inflation Reduction Act spending, a lot of which is going into industrial policy as well as the Infrastructure Bill. Improved permitting processes will have to be a part of that. The Trump administration, if they follow through with what they’re saying, is going to double-down on onshoring and supporting U.S. manufacturing. So, I don’t see anything negative about that. The consequences of debt levels, the consequences of higher taxes on corporations, the consequences of tariffs. All of those will not be favorable to manufacturing. And so it depends on what the reality is post-election.”
• AutoZone ($51.9B, Consumer Cyclical, Specialty Retail): “As far as tariffs, those sorts of things have ebbed and flowed over the years. If we get tariffs, we will pass those tariff costs back to the consumer. As they turn through, we’ll generally raise prices ahead of what the tariffs will be. You get some gross margin improvement as the cost of goods turn in, and then it flattens out.”
• Brady ($3.5B, Industrials, Security & Protection Services): “We’re living in an era with a fair amount of industrial investments sitting on the sidelines depending on which way elections go and what U.S. energy policy becomes, so we’re trying to thread the middle on range of possible outcomes, which means we see relatively slow GDP growth in the United States and Europe. Certainly, we don’t see anybody deferring maintenance or deferring necessary capital expenditures. But at the same time, we don’t see too many customers that were all in and deciding to make really significant capital investments. They’re, again, waiting to see the outcome of some of the elections both in Europe and America.”

While Europe Shows Signs of Recovery, China Continues to Weigh On Performance; Optimism Related to Recently Announced Stimulus Measures Is Tepid

Europe

• TD SYNNEX ($10.1B, Technology, Electronics & Computer Distribution): “Europe is recovering faster. Specifically, the distributors are serving also the B2C market. And we see a recovery coming from the B2C market. The B2B market is a little bit more muted. But again, we should see some acceleration.”
• Quanex Building Products ($1.3B, Industrials, Building Products & Equipment): “Consumer confidence has started to show a little more of a bounce back in the UK and not as much yet in Europe. UK has been a little more positive than what we’ve seen in continental Europe. The Bank of England has been a little more ahead, but their economy has lagged a little longer than the U.S. has. So that the UK market has suffered a little bit. There’s probably more optimism for us in the UK than we do see in continental Europe on a short-term basis.”

China

• General Mills ($41.2B, Consumer Defensive, Packaged Foods): “The challenge for us really is China. And much like you’ve seen and probably heard others in the market, talk about the consumers pulling back. And when they do, shop traffic is down.And so, as we look at the rest of the year, while we would like that trend to improve, we’re not banking on that trend improving for us to hit our guidance for the year. And it’s not really an execution challenge on our part, it really is more of a macroeconomic channel with the shops.”
• McCormick & Co ($22.5B, Consumer Defensive, Packaged Foods): “On China, we do expect the environment there is going to remain broadly challenged. And we do expect our business probably to be down slightly in 2024. So, for the sake of clarity, that’s the outlook that we’re looking at for the balance of our year. But when you reference this latest news on stimulus, I’m not in a position to predict the impact of that. I will say, though, in previous actions that have been taken in terms the country regarding stimulus, I don’t know that they necessarily had a material impact on the consumption in our business. And so right now, we believe that they’ll continue to make sequentially good progress. It’s just not at the speed we thought it might happen.”
• Korn Ferry ($3.8B, Industrials, Staffing & Employment Services): “Although not a significant part of the firm, what you’ve seen in China has definitely had an impact on our growth rates. And it’s been significant for us. I read someplace that before the pandemic, there were something like 325 flights to China, Mainland China, a week from the United States. And now it’s like 35. And that’s definitely reflected in our business. And so, our growth would have been substantially different or the decline wouldn’t have been as much with China.”