Let’s dig into a number of reports from firms in the news Friday.
Abercrombie & Fitch (ANF)
Investors in teen retail stocks are literally trying to catch lightning with respect to fashion trends. Predicting fashion in any demographic isn’t easy, but we’d point to anticipating teen behavior as the most difficult analytical proposition within any retail segment. It shouldn’t be surprising that fundamentals within the teen retail space are volatile, and Abercrombie & Fitch’s third-quarter update matched such a profile. During the period, net sales in its third quarter fell 12% and comparable store sales dropped 10%.
From the release: Sales during the quarter were below expectations with comparable sales in September and October being significantly weaker than August. Although the international stores segment was the most difficult, the lower sales trend was broadly based. In addition, the company now expects modest gross margin rate erosion for the quarter compared to last year, given the highly promotional and challenging environment.
Abercrombie & Fitch expects non-GAAP earnings per share in the third quarter to be in the range of $0.40-$0.42, far below consensus expectations of $0.69. We have little interest in owning a teen retailer at any time, and Abercrombie & Fitch gives us little reason to change our tune.
Disney (DIS)
We’re big fans of Disney, and we think it has one of the most recognizable brands in the world. The company just rounded out a fantastic fiscal 2014, with revenue advancing 8% and net income leaping 22%. Earnings per share for the year increased 26%, to a record $4.26.
From the release: Our results for Fiscal 2014 were the highest in the Company’s history, marking our fourth consecutive year of record performance. We’re obviously very pleased with this achievement and believe it reflects the extraordinary quality of our content and our unique ability to leverage success across the Company to create significant value, as well as our focus on embracing and adapting to emerging consumer trends and technology.
Capital spending is expected to advance modestly in 2015, which has some concerned, but we think Disney continues to execute well. Were it not for its lower dividend yield than Hasbro’s (HAS), we’d be very interested in shares. Disney yields less than 1% at the time of this writing.
First Solar (FSLR)
We have practically no interest in owning any solar company. A look at the structure of the industry is enough for any rational investor to steer clear:
The solar industry is extremely competitive and continually evolving as constituents strive to differentiate themselves to better compete within the broader electric power industry. Significant price reductions (per watt), reduced margins, and drastic market share shifts have become commonplace for participants. Profitability can be negatively impacted from government subsidies and sovereign capital that allow firms to operate unprofitably for extended periods of time. Production overcapacity is another major concern and will likely persist for some time. We think the structure of the solar industry is very poor.
Friday, First Solar lowered its 2014 revenue guidance by $100 million, and such a revision sent shares tumbling. Though the company raised its annual gross margin guidance modestly, free cash flow metrics haven’t been terribly exciting at the company. We see little reason to include shares in the Best Ideas portfolio, though speculators may be content to ride the ups and downs of solar constituents. It’s not our cup of tea.
General Mills (GIS)
General Mills is a steady-eddy consumer staple, but we’ve been saying for some time that the company, as an investment, is not cheap. It shouldn’t be surprising then that shares dropped nearly 4% following its reduced guidance for fiscal 2015 sales and earnings.
From the release: …in response to continued weak food-industry trends in the U.S. and slowing growth in key emerging markets, the company is reducing its sales and earnings expectations for the fiscal year ending in May 2015. General Mills fiscal 2015 net sales in constant currency are now expected to grow at a low single-digit rate from the 2014 base of $17.9 billion…Fiscal 2015 adjusted diluted earnings per share are expected to grow at a low single-digit rate in constant currency from the base of $2.82 earned in fiscal 2014. Adjusted diluted earnings per share for the second quarter ending Nov. 23, 2014, are expected to be between $0.75 and $0.77. This compares to adjusted diluted EPS of $0.83 earned in the prior year’s second quarter. Previously, General Mills had been targeting mid single-digit constant-currency growth in net sales and segment operating profit, and high single-digit constant-currency growth in adjusted diluted EPS for fiscal 2015.
General Mills still trades north of $50 per share, and we value the consumer food giant in the mid-$40s. We’re also reiterating our view that the company’s best dividend growth years are behind it (). There are much better dividend growth ideas to choose from within the Dividend Growth portfolio. The firm’s Dividend Cushion is 0.9 at the time of this writing.