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2:39 pm Looking Ahead - May 27, 2016

Market participants will get an extended weekend with the Memorial Day break.  Upon their return, though, the debate over the Fed's likely course of action at its June meeting is going to pick right back up thanks to Tuesday's release of the core PCE Price Index for April.

Core PCE Price Index for April (Tuesday, May 31, 8:30 a.m. ET)

  • Why it's important
    • The PCE Price Index is the Federal Reserve's (Fed) primary gauge for assessing inflation trends
    • Since the Fed has acknowledged that it thinks the impact of declining oil prices is "transitory," it may be inclined to look past a low reading for the PCE Price Index and instead direct its focus on the core PCE Price Index, which excludes volatile food and energy prices, for insight on the inflation path
    • The figure in focus won't be the month-over-month change but the year-over-year change since the Fed is looking for progress toward its longer-run inflation target of 2.0% to justify raising the fed funds rate
    • Any deviation from the trend in core PCE will stir the debate about when the Fed should begin its rate normalization process

  • A closer look
    • The core PCE Price Index was up 1.6% year-over-year in March, down from 1.7% in February
    • The year-over-year change in the PCE Price Index was 0.8% in March, down from 1.0% in February

      The Numbers:

      Tue, May 31 Time of Release Consensus Prior
      PCE Prices - Core 8:30 ET 0.2% 0.2% 0.1%


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  • What's in play?

    • Treasuries (TBT, TLT, SHY, SCHO) 
    • S&P futures
    • Fed funds futures

    • Currencies
      • EUR/USD
      • USD/JPY
      • GBP/USD
      • USD/CHF

    • Index ETFs
      • SPDR S&P 500 ETF (SPY)
      • PowerShares QQQ Trust (QQQ)
      • iShares Russell 2000 (IWM)

    • Rate-sensitive groups
      • Financials (XLF, KRE, KIE, IAK)
      • Utilities (XLU, VPU, IDU, FXU)
      • REITs (VNQ, IYR, ICF, REM)
      • Homebuilders (XHB, ITB)
      • Dividend Payers (VIG, DVY, SDY, VYM, HDV) 

11:58 am Thermo Fisher [TMO] buys FEI [FEIC] for $4.2 billion; Expects deal to be $0.30 accretive to EPS

Thermo Fisher (TMO 151.61, +0.41) trades modestly higher, +0.27%,  following news this morning that it would buy electron microscopy firm FEI (FEIC 107.75, +13.17 +13.92%) for $107.50 per share, or $4.2 billion total.

For those who are not familiar, TMO is a manufacturer of equipment, software and services for research and analytical instruments. Mainly, it operates under the Laboratory Products and Services, and Life Sciences Solutions segments within the health care space. TMO's other segments include Analytical Instruments and Specialty Diagnostics. As for FEIC, the company mainly manufacturers, designs and supports high-performance microscopy (the use of microscopes) workflow. Following the closing of the deal, FEIC will be integrated into TMO's Analytical Instruments segment.

The deal, which will put FEIC's nearly $930 million 2015 revenues to work, is expected to be approved by early 2017. At such time, TMO expects said deal to be $0.30 accretive to its adjusted earnings per share (EPS) in the first full year. Further, TMO expects to realize about $80 million in synergies by year three following the deal's closing, consisting of about $55 million of cost synergies and about $25 million of adjusted operated income benefit from revenue-related synergies.

Recently, on May 4, FEIC reported Q1 results which beat expectations on the top line with revenues of $229 million and EPS which was in-line. At that time, the company guided for Q2 EPS in-line and better than expected revenues. TMO, on Apr 28, reported a better than expected Q1 from top to bottom as EPS was $1.80 and revenues grew 9.6% versus the prior year to $4.29 billion. TMO's guidance was raised at the time to FFY16 EPS to $8.05-8.19 from $7.80-7.96 and FY16 revenues to $17.86-18.04 billion from $17.36-17.56 billion, aided by the recently closed Affymetrix deal.

Shares of both FEIC and TMO trade higher at the moment as the broader market posts modest gains Dow Jones Industrial Average (+0.19%), S&P 500 (+0.29%), Nasdaq Composite (+0.50%).

11:23 am Expected IPO Pricings May 31 - June 3

Tuesday, May 31

  • None scheduled.

Wednesday, June 1

  • None scheduled.

Thursday, June 2

  • Nant Health (:NH): The medical technology company focused on enabling improved patient outcomes for critical diseases is expected to price its 6.5 million share IPO within a range of $12.50-$15.50.

Friday, June 3

  • Sensus Healthcare (:SRTSU): The medical device company specializing in the treatment of non-melanoma skin cancers is expected to price its 1.8 million share IPO at $6.25.

10:15 am Big Lots [BIG] Rallies 9% After Lifting Full Year Earnings Guidance

Big Lots (BIG 48.75 +4.09) reported first quarter earnings this morning of $0.82 per share, excluding non-recurring items, which topped expectations. On the top line, revenues rose 2.5% year/year to $1.31 billion, which fell in-line with expectations.

The company also reported first quarter comps of +3%.

Inventory ended the first quarter of fiscal 2016 at $807 million, compared to $835 million for the first quarter of fiscal 2015. Inventory per store decreased compared to last year, combined with a lower store count year over year.

Looking ahead, the company expects to see second quarter earnings falling in the range of $0.42-0.47, excluding non-recurring items, which comes in-line with current expectations. The company said, "This guidance is based on an estimated comparable store sales in the range of flattish to an increase of 2% compared to a 2.8% comparable store sales increase in the second quarter of fiscal 2015."

For the full fiscal year 2017, the company raised its earnings outlook to $3.35-3.50 from $3.20-3.35, excluding non-recurring items, which is now above current expectations. The company said, "This outlook is based on a comparable store sales increase in the low single digit range and total sales up slightly. We estimate this financial performance will result in cash flow of approximately $200 million."

9:49 am Splunk [SPLK] trades flat on AprQ earnings/guidance; a play on the explosion in big data

Splunk (SPLK) is trading roughly flat after reporting Q1 (Apr) results last night. Many investors have probably heard the Splunk name but they do not really understand what they do. Basically, Splunk provides software that allows its customers to collect, index, search, monitor and analyze data regardless of format or source. Its software helps make sense of large and diverse data sets commonly referred to as big data and it's specifically tailored for machine data.

Machine data is produced by nearly every software application and electronic device at a company. Each thing that happens contains a time-stamped record of various activities, such as transactions, customer activities, and security threats. Beyond a company's traditional IT and security infrastructure, every processor-based system generates machine data. Examples include HVAC controllers, manufacturing systems, smart electrical meters, GPS devices and radio-frequency identification tags, and many consumer-oriented systems, such as electronic wearables, mobile devices, automobiles and medical devices that contain embedded processor chips.

These things are continuously generating machine data. Splunk's software helps make sense of all these data points in real-time so management and IT staff can make the correct operational decisions.

Its flagship product is Splunk Enterprise, a machine data platform, comprised of collection, indexing, search, reporting, analysis, alerting, monitoring and data management capabilities. Splunk Enterprise can collect and index hundreds of terabytes of machine data daily, irrespective of format or source. Its platform uses Splunk's patented data processing architecture that performs dynamic schema creation on the fly, enabling users to run queries on data without having to define or understand the structure of the data prior to collection and indexing. This is in contrast to traditional IT systems that require users to establish the format of their data prior to collection in order to answer a pre-set list of questions.

More than 11,000 customers in over 110 countries in a wide variety of industries use Splunk software and cloud services. In Q1 (Apr), Splunk signed more than 450 new enterprise customers. New and expansion customers include: Auburn University, Chicago Public Schools, Chipotle, Clemson University, Denver International Airport, FamilySearch, GoodData, Virginia Dept of Motor Vehicles, World Bank Group.

Turning to the Q1 (Apr) results, Splunk reported a non-GAAP loss of $(0.02) per share, which was in-line with market expectations and a bit below the $(0.01) loss in the prior year period. Revenue rose 48.0% year/year to $186.0 mln, well above prior guidance of $172-174 mln. License revenue rose 41% YoY to $101.0 mln. In terms of guidance, Splunk expects Q2 (Jul) revenue to come in around $198-200 mln, in-line with market expectations while full year revenue guidance was bumped up to $892-896 mln from prior guidance of approximately $880 mln.

On the call, Splunk talked about how it sees the wave of digital transformation impacting every industry and every enterprise. The amount of data being generated is exploding, and that trend will continue. Splunk sees itself as the best platform to enable customers to collect, analyze, and get maximum value from that data.

Also, Splunk recently released Enterprise 6.4 which includes new interactive visualizations and an open library on Splunkbase, where customers and partners can develop and share their custom visualizations. In addition, Splunk enhanced its predictive analytics, improved query performance, and made a series of security and management improvements. Splunk also reduced the cost of historical data storage by 40% to 80%.

In sum, the stock is trading roughly today despite the large revenue upside. Our sense is that the in-line EPS result and the luke warm JulQ revenue guidance is being seen as a bit of a disappointment after Splunk reported two good size beats in Q3 (Oct) and Q4 (Jan). Also, the stock had rallied 17% since its May 6 close heading into this report, so the expectations were likely pretty high. Overall, it was a pretty good quarter for Splunk, just maybe not the blowout some investors were expecting.

9:23 am Veeva Systems [VEEV] set to open higher following better than expected Q1 results

Veeva Systems (VEEV) is indicated to open approximately +8% higher this morning after the company reported better than expected Q1 results and issued guidance that was in-line or above expectations.

Company Background:

VEEV provides cloud-based software for the life sciences industry. The company's flagship product is its CRM software, which competes primarily against offerings from Oracle (ORCL) and IMS Health's Cegedim unit. The company's second product is Vault (content management), which has grown rapidly over the past 2 years. The company also provides a number of data services, including Network, OpenData, and KOL Data.

Readers might call that VEEV was a hugely-hyped IPO when it went public in October 2013 due to its triple-digit sales growth, profitability, and large addressable market (:TAM). However, right out of the gate VEEV had an extremely rich valuation, and management stumbled early on by reporting some disappointing quarters relative to the very high investor expectations at the time. The stock went into a precipitous decline in early 2014, and since then the shares have been range-bound as the company put up generally solid, but unspectacular results. Recent growth has been fueled by robust sales of the Vault product. Given this product momentum, the company has released 10 different Vault applications that span clinical, quality, regulatory, medical, and commercial use.

Q1 Results & Guidance:

The company reported 1Q17 (April) numbers that comfortably beat expectations. Specifically, Q1 sales rose +33% to $119.8 million, while EPS rose +25% to $0.15. Subscription revenue was up +39% year-over-year to $96 million.

In terms of guidance, for both 2Q17 (July) and for FY17 (January), the company issued revenue guidance that was above expectations and EPS guidance that was in-line. Specifically, the company sees Q2 sales of $125.5-$127.0 million and EPS of $0.13, and sees FY17 revenues of $516-$520 million, up from prior guidance of $508-513 million, and EPS of $0.55-0.57.

Within the press release, the CFO commented that: 'We had yet another exceptional quarter, posting results ahead of guidance and delivering high growth and profitability. Cash flow was also a standout in the first quarter, with the addition of more than $100 million to the balance sheet.'

8:59 am GameStop Down After Results Show Continued Weakness in Core Business

Shares of GameStop (GME 28.15, -1.83) have faced a downtrend that dates back to late 2013 when the stock hit a 5+ year high at $57.74. The video game retailer has struggled since then amid an increasing number of game sales being conducted online at the expense of physical game sales, which has been GameStop's main business.

The company reported above-consensus earnings of $0.66 per share on revenue of $1.97 billion. GameStop's top line contracted 4.3% year-over-year, but matched analysts' average estimates.

Same store sales declined 6.2%, which was a bit ahead of the company's guidance for a decline between 7.0% and 9.0%. This followed an 8.6% increase in same store sales registered during the same quarter a year ago.

The company noted that it was able to exceed its guidance range thanks to a solid showing from its non-physical gaming businesses like Technology Brands, Collectibles, and Digital, which make up 42.0% of operating earnings. GameStop has been putting increasing emphasis on the non-physical gaming businesses in recent years in response to the changing landscape and declining physical game sales.

GameStop reported that new hardware sales declined 28.8% in the first quarter, which faced a tough comparison due to strong software title launches in the first quarter of 2015.

Mobile and Consumer Electronics sales increased 40.8% with Technology Brands revenue increasing 62.2%. These growth rates reflect the company's attempt to offset slowing sales of physical video games with sales of mobile phones and other personal electronics. GameStop added 18 Technology Brands stores to its portfolio during the first quarter and two AT&T authorized resellers are expected to be added by the end of the second quarter.

Looking forward, the company reaffirmed its full-year guidance for earnings between $3.90 per share and $4.05 per share, which is on the low end of market expectations. Comparable store sales are expected to be between -3.0% and 0.0%.

Today's pre-market selling puts GameStop on track for a return to the bottom of this year's trading range between $24.33 and $33.72.

8:18 am Ulta Beauty [ULTA] Hits Fresh Record After Earnings Beat

Ulta Beauty (ULTA 231.80, +18.11) reported better than expected results for the first quarter, and its stock has jumped 8.5% in pre-market action even though the company's guidance was a bit of a mixed bag.

The company delivered earnings of $1.45 per share on $1.07 billion in revenue. Ulta's top line surged 23.7% year-over-year, beating analysts' average estimates. The jump in revenue was fueled by a 15.2% increase in comparable sales. The comparable sales growth rate accelerated from 11.4% in the same quarter a year ago. Traffic increased 11.0% and the average ticket grew by 4.2%.

Although the company generated strong growth at physical locations, it was e-commerce sales that saw the sharpest increase, surging 38.8%. However, this increase accounted for just 130 basis points of the 15.2% jump in comparable sales as e-commerce sales totaled $61 million.

Ulta saw a 20-basis point uptick in selling, general and administrative expense (22.4% of net sales), but its gross profit improved 150 basis points to 36.4% of sales thanks to leverage in fixed store costs and higher merchandise margins.

Merchandise inventories registered at $843.50 million, which was up from $662.90 million in the same quarter a year ago. The increase was due to 89 net new stores and the opening of Ulta's fourth distribution center in Indiana. Average inventory per store increased 14.5%.

The company opened 13 new stores during the first quarter, pushing its total store count to 886.

Looking forward, Ulta expects to register second-quarter earnings between $1.32 per share and $1.37 per share, which is short of current market expectations. However, guidance for revenue between $1.041 billion and $1.058 billion is ahead of analysts' average expectations. For the full year, the company expects comparable sales growth between 10.0% and 12.0%, which is up from the previous forecast for growth between 8.0% and 10.0%.

Shares of ULTA are set to open higher by 8.5%, which will put the stock at a fresh record high.

8:15 am Deckers Outdoor [DECK] Hits the Deck with Disappointing Guidance

Deckers Outdoor (DECK 49.25) sells footwear, apparel, and accessories.  In other words, it is in just about the worst spot in retail a company can be in right now.  Be that as it may, the seller of the popular UGG boots came through with better than expected fiscal fourth quarter results.  That news, however, has been overshadowed by the retailer's disappointing guidance for its fiscal first quarter and fiscal 2017.

Briefly, the company's fourth quarter net sales increased 11.2% to a record $378.6 million, bolstered by a 13.3% increase in UGG brand net sales to $245.6 million.  Its non-GAAP diluted earnings per share was $0.11 versus $0.04 in the same period a year ago.  For fiscal 2016, net sales increased 3.2% to a record $1.875 billion and non-GAAP diluted earnings per share declined 3.4% to $4.50.

Like other retailers in its space, Deckers was challenged by the shift in consumer spending preferences and weak mall traffic.  Record warm weather was another headwind for Deckers during the year.

These factors contributed to higher promotional activity, which in turn weighed on the company's gross profit.  For the fourth quarter, Deckers reported a gross margin of 40.9% compared to 44.7% last year.  Non-GAAP gross margin was 42.3%. This was a disappointment, as Deckers had forecast gross margin to be 45.5% at the time of its third quarter report in February.

Its full-year gross margin was 45.2% compared to 48.3% last year, while its non-GAAP gross margin was 45.4%.  It was expected in February that the full-year gross margin would be approximately 46%.

Unfortunately, one isn't left with the impression on the other side of the fourth quarter report that the promotional activity will come to a quick end.  That's because Deckers said its inventories at fiscal year end were up 25.5% from fiscal year end 2015, which is well above its overall sales growth. 

For its fiscal first quarter, Deckers is projecting net sales to be down 20% to 25% and has said it expects a diluted loss per share of approximately $2.10 to $2.20 compared to a diluted loss per share of $1.43 for the same period a year ago.  The expected sales decline, it added, is due primarily to the timing of order shipments between quarters.

For fiscal 2017, it expects net sales to be flat to down 3%, its gross margin to be in the range of 47.0% to 47.5%, and diluted earnings per share to be in the range of $4.05 to $4.40.  The high end of that range is below analysts' average expectation while the midpoint would translate to a 6% decline from fiscal 2016.

Shares of DECK are trading 1.7% lower in pre-market action.  The fallout from the disappointing guidance has been somewhat limited based on the fact that DECK has already declined 15.4% over the last month and is down 46% since the start of 2015.  In other words, investors were already braced to hear disappointing news.

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