🍺 Getting Drunk on Profits

POWERED BY THE STREET SHEET SUMMER GIVEAWAY

THE STREET SAYS

Hi Everyone - we hope you had a relaxing Memorial Day Weekend. Seeing as how it's the unofficial start to summer, we've organized a giveaway to help ring in the season. Keep scrolling for more, or if you just want to see what we're giving away, smash this link and enter for a chance to win.

REVIEW

US stocks fell Friday as job market data may have dented investor sentiment. Although the nonfarm payrolls report showed the economy added 390,000 jobs in May, that’s the slowest rate of growth since April 2021.

The Federal Reserve is closely watching what’s happening in the labor market as they enact tighter monetary policy in response to record-high inflation. The central bank’s ongoing mission is to strike a balance between its inflation and unemployment targets. Fed officials indicated last week the central bank is unlikely to slow rate hikes anytime soon, especially given that 2% inflation remains its goal.

In April the CPI showed prices rising 8.3% year-over-year, while May’s index is due this Friday. The central bank also began reducing its balance sheet last week, as anticipated.

Zooming out, analysts note the prospect of slowing job growth, rising prices, and a hawkish Fed could negatively impact markets.

In company-specific news, Apple was the subject of a negative research note from Morgan Stanley, which argued that the tech giant is experiencing slowing App Store growth.

Frontier Airlines offered Spirit Airlines a $250 million reverse breakup fee, which is aimed at convincing shareholders to approve the two companies’ merger. It would come into play if regulators block the tie-up, which will be voted on at Spirit’s shareholders' meeting on Friday.

For the week as a whole, the Dow Jones Industrial Average fell 0.9%. The S&P 500 slipped 1.2% and the Nasdaq Composite declined 1.0%.

PREVIEW

Tomorrow, no major economic data is scheduled for release.

Tuesday, be on the lookout for April’s foreign trade balance, which is the difference between the value of the nation’s imports and exports. In March the trade deficit increased by 22.3% to $109.8 billion, marking the first time the number exceeded $100 billion. April’s consumer credit is also due, after the number soared by $52 billion in March, exceeding expectations. Revolving debt, such as credit cards, surged 21.4% higher.

Wednesday, the Mortgage Bankers Association will release its weekly mortgage applications and the average rate on a 30-year fixed loan. Last week mortgage applications declined by 2.3% to hit a new four-year low. The number has been decreasing as interest rates have risen. Keep an eye out for April’s revised wholesale inventories as well.

Thursday initial and existing jobless claims will be published. Last week the number of people filing for unemployment benefits declined by 200,000 and hit its lowest level since 1969.

Friday, inflation comes back into focus as the May CPI is due. In April the index showed prices increasing 8.3% from the same time period in 2021. That’s near a 40-year high. Core CPI, which strips out volatile fuel and food costs, will be released as well. May’s federal budget balance is also published.

On the earnings front, NGL Energy Partners (NGL), Dave & Busters (PLAY), Thor Industries (THO), Nio (NIO), and Docusign (DOCU) will all share their latest reports this week.

The report for restaurant and entertainment company, Dave & Busters (PLAY), will be an interesting indicator of a post-pandemic “return to normalcy.” The pandemic hit the company hard given lockdown and social distancing measures. However, Dave & Busters has been posting significant year-over-year increases in visits as Americans are now looking for places to socialize.

GIVEAWAY

Enter For Your Chance to Win

Picture this: It’s a summer Friday in midtown Manhattan and you're sitting at your desk about ready to wrap up the week. It's intern season, so baby-faced college juniors with suits that are two sizes too big are shuffling papers at their desks to make it look like they're busy.

It's 5 pm so you decide it's time to sneak out early and monitor emails from your phone since your boss is "working" from home.

As you're walking through Grand Central Station you can feel the tangible June energy. Couples are holding hands as they head out of town for the weekend and colleagues are having post-work beers.

As you pass the infamous clock in the middle of the main terminal you look up and notice the turquoise ceiling and constellation of stars. You also notice something else: the massive American Flag that hangs above the south entrance. For all of its faults, the United States is still the best darn thing going.

It's certainly not perfect, but it's still the country where you can put tape on your intern's mouse sensor so they can't move or click on anything and subsequently start to freak out.

Since Flag Day is less than 2 weeks away, we wanted to organize a fun summer giveaway for all of our readers. In addition to a 100% Made in USA Flag, we're also giving one lucky winner an Amazon Echo dot, and the Smathers & Branson hat pictured above. It's perfect for the golf course, brewery, or MSG to root on the Rangers.

Don't wait: This giveaway ends on Wednesday so click here to enter to win.

As Pandemic Fades, Cities Draw Summer Travelers

Extended Stay Losing Its Luster?

Short stays at hotels in major cities are making a comeback as life returns to normal in the travel sector, more than two years after COVID-19 first hit US shores. Airbnb (ABNB) and other extended stay operators are still experiencing strong demand, but travel to cities is making a comeback after cratering during the pandemic.

During its first-quarter earnings call, Airbnb said bookings in urban destinations have returned to levels seen prior to the pandemic, while stays for shorter periods of time are gaining in popularity.

These trends are considered good tailwinds for the traditional hotel sector. In response, a pair of companies including Booking.com (BKNG) and Expedia (EXPE) have increased their marketing spending in an effort to appeal to the urban influx.

Online Travel Agents’ Comeback

The advertising investments seem to have paid off for Booking.com. According to market research firm Sensor Tower, the number of people who downloaded Booking.com’s app increased 13% in April from January of 2020. Airbnb’s app installs fell 12% over the same time period. In April 2022 alone, Booking.com had 48% more app installs on a monthly basis than Airbnb.

It's not just Booking.com and Expedia that are poised to benefit from the shift in travelers’ preferences. In the past, online travel agents have generally benefited when demand for city stays picks up, which is happening now. According to AirDNA, a data analytics company, the biggest cities in the US are poised to see a 45% increase in new bookings this summer compared to last year.

Pricing Helps

Another factor favoring online travel agents and more traditional lodging is pricing, especially with inflation at a 40-year high. Airbnb said its daily rates were up 37% in the first quarter when compared to 2019. The average daily rate for urban hotels across the globe was down in April compared to the same month in 2019.

Tracking Airbnb and Booking.com’s stock performance, shares of Airbnb have fallen over the past six months while Booking’s stock is slightly up.

City travel is heating up this summer as life returns to its new COVID-19 normal. That bodes well for the traditional online travel agents and booking sites, as well as the hotel sector in general. Barring another widespread pandemic outbreak, it could also benefit their stock prices.

Retail Dichotomy: Upscale Outperforming

Pricey Apparel Is In Season

Last week we outlined why discount retailers may benefit from an oversupply of apparel hitting the market. Excess inventory means outlets like T.J. Max (TJX) and Ross Stores (ROST) should have more leverage from a pricing perspective.

While this is still true, don't underestimate the power of upscale items. In fact, yoga pants and leggings are currently being passed over for more professional attire that has been collecting dust in the closet. This dynamic appears to be lifting the fortunes of Nordstrom (JWN), Gap (GPS), Urban Outfitters (URBN), and Macy’s (M) all of which are doing brisk sales of high-priced dress clothes.

Nordstrom’s performance is illustrative of this trend. Its sales increased roughly 19% during its quarter ending April 30. Gap’s Banana Republic brand, which sells work clothes and pricier attire, saw sales jump 24%. Meanwhile, sales at its lower-priced alternative, Old Navy, declined 19%.

The same trend has been observed at Urban Outfitters. Its more expensive Anthropologie and Free People brands are performing better than its cheaper namesake. Meanwhile, Macy’s-owned Bloomingdales, which sells designer clothes, saw sales jump 27%. Macy’s sales were up just 10% by comparison.

Life After COVID

Many analysts argue it makes sense that demand for fancy clothing is staging a comeback. Well-heeled consumers who can afford expensive attire are now returning to the office, going on vacation, and socializing again. They have been able to weather the inflationary environment better than their budget-conscious counterparts.

Ralph Lauren (RL) reported that average selling prices increased 13% last quarter year-over-year, but that didn’t stop shoppers from hitting its stores. The pricing increase has helped the company offset supply chain and freight shipping costs.

Some mid-tier retailers that can’t raise prices aren’t getting the same benefit. Abercrombie & Fitch (ANF), for example, reported strong sales in the recent quarter but posted a net loss because of freight costs.

More Potential Upside

Luxury brands may have even more room to grow, here's why. Office occupancy rates are still about 45% lower than pre-pandemic levels. This means there are plenty of people who are still working at home, but that may get the Elon Musk "return to office" email any day now. If and when they get this email, they may need to spruce up their wardrobes before they head back to the water cooler.

Wedding season is also expected to be a strong one this year, as is the demand for travel. As a result, retailers catering to people with higher discretionary incomes could see increased spending through the remainder of the year.

STREET TREATS

Dad at the Grill, I’ll Turn This Car Around, Summer Giveaway

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🦅 Flag Day is coming and we’re giving our readers a chance to win a bunch of free stuff! Sign up to enter as we’re gifting an American flag and flag pole kit, a POW-MIA flag, and a state flag of the winner’s choosing. Plus, you could win a brand new Amazon Alexa and matching American flag decal. Enter now for your chance to win.

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Drunk on Profits

Smoking Is Shunned, Shots Are OK

According to the World Health Organization, alcohol causes three million deaths per year. You wouldn’t know it looking at beverage companies’ stock prices. At a time when conscientious investors are shunning tobacco shares, they’re still embracing wine, beer, and spirits makers.

According to an Ethos ESG analysis of funds with 200 or more holdings, only 2.5% of global assets under management keep alcohol companies out of their portfolios. Conversely, 11.5% of funds exclude tobacco stocks. Furthermore, alcohol companies that make comparatively stronger liquor enjoy higher share prices than companies that make lower strength alcohol including beer and hard seltzer. That’s despite the U.S. government taxing hard liquor at a higher rate than beer.

Tobacco’s Losing Hand

Social norms may explain why investors seem more comfortable of alcohol stocks compared to those of tobacco companies. Drinking is more accepted around the world than smoking. Alcohol is a staple in bars, restaurants, nightclubs, and backyard BBQs. Drinking also doesn’t sicken people close by, such as with secondhand smoke.

What’s more, Big Tobacco has been accused of hiding the negative health effects of their products for decades, falling out of favor with regulators and politicians along the way. Many alcohol companies did the opposite, promoting responsible drinking in ads and diversifying into non-alcoholic products.

Taxes May Cause Hangover

A changing tax environment is one headwind alcohol companies may face in the future. As it stands, the World Health Organization (WHO) recommends regulators place a 75% tax on the cost of a pack of smokes but only 28% for alcohol. The WHO is now calling on countries in Europe to increase the taxes they collect on wine, spirits, and beer.

That has the potential to cause a significant tax burden given Europe has the highest alcohol consumption per person in the entire world. This could prove particularly troublesome for drink companies that do business in France and Germany. Beer taxes currently are around 7%. If that number were to rise, per the WHO's recommendations, profit margins would shrink.

Alcohol stocks aren't going to disappear from funds anytime soon but more taxes could eat away at the sector’s profit margins. It’s not exactly a “last call” type of moment, but is something that could give investors a hangover.

This communication from The Street Sheet is for informational purposes only. It is not intended to serve as a recommendation to buy, sell, or hold any security and is not an offer or sale of a security. Information contained within should not be perceived as a research report and is not intended to serve as the basis for any investment decision. Any third-party views reflected herein do not reflect the opinion of The Street Sheet. All investments involve risk and the past performance of a security does not guarantee future results or returns. There is always the potential for financial loss when investing in securities or other financial products. Investors should consider their investment objectives and risks before investing.