To The Moon

• Nike Inc. reported a top and bottom line beat but the inventory build-up was a concern for investors.
• PepsiCo Inc reported a strong quarter as the company passed on pricing pressure to the consumer.
• Ford reported an in-line quarter with a slight surprise in revenue, management remains on course to transition to EV.
• Brunswick reported a mixed quarter as the company started to feel some of the cutbacks from consumers.
• Keurig Dr. Pepper reported a mixed quarter that was driven by growth from Beverages as restaurants reopened.

The third quarter of 2022 earnings was the second quarter where we started to see the full effects of Federal Reserve interest rate hikes. The first earnings review covers our fund’s consumer sector positions in Nike Inc.(NKE), PepsiCo Inc. (PEP), Ford Motor Company (F), Brunswick (BC), and Keurig Dr. Pepper Inc. (KDP). The themes that were evident in all five earnings reports were cautious outlooks from management, the strong USD was a headwind, and elements of inflation are still present. The last theme of inflationary conditions all but ensures that the Federal Reserve will keep on raising interest rates to tame inflation.

Nike Inc. (NKE): The shoe company reported earnings of $0.93/share (beat WallStreet consensus by $0.01) and revenue of $12.69 billion (beat WallStreet consensus by $400 million). Nike’s headline numbers are mixed in comparison to our fund estimates of $0.97/share on revenue of $12.3 billion. The revenue number was quite impressive because we expected that number to be subdued and for management to control expenses (hence the high earnings estimate). The company reported revenue growth of 4% which would have been 10% if it was not for the strong dollar. The sales growth was driven by the Direct Sales segment which was up 8% year over year while Digital Sales are up 16% but coming from a smaller revenue base.

Looking at the gross margins, Nike reported a contraction of 2.2% to 44.3% which came in well below our estimate of 46.8%. This is evidence that inflationary pressure is still affecting company operations (i.e. higher fuel and shipping costs). Operating overhead was up 12% due to higher wage costs and benefits for employees. All these headwinds resulted in Nike’s net income going down 22% to $1.5 billion. The company reported an inventory build-up of 44% which means that there will be discounts and markdowns in the coming quarters. The inventory build-up resulted in Nike’s free cash flow shrinking from $927 million to $93 million. The company had a net cash decrease of $1.35 billion and ended the quarter with $7.3 billion on the balance sheet.

Approximately $1.5 billion was returned to shareholders before management paused Nike’s share buyback program as they look to redeploy capital. Overall it was a tough quarter for Nike with the margin contraction and inventory build-up. This resulted in the stock selling off 10-plus percent and we took that as an opportunity to add to our stock position.

PepsiCo Inc. (PEP): The snack and beverage reported a top and bottom line beat of $1.97/share ($0.12 ahead of WallStreet estimates) on revenue of $21.97 billion ($1.15 billion ahead of WallStreet estimates). PepsiCo’s earnings came in way ahead of our fund estimates of earnings of $1.86/share on revenue of $20.73 billion. The company reported revenue growth of 8.8% with organic revenue up 16% mainly from pricing power. PepsiCo raised prices by 17% across its product portfolio in order to preserve its margins. Looking at segments, Frito-Lay was the main growth driver with revenue growth up 19.6% while Beverages were up 3.6%.

Despite passing on the majority of the higher costs to customers, PepsiCo still had contracting gross margins from 53.5% to 53.1% (evidence of the inflationary pressure). Management is executing at a high level as operating profit grew by 6.14% to $3.35 billion. Looking at the cash flow numbers, year-to-date operating cash flow was at $6.3 billion down from $6.6 billion. If we were to back out the company’s one-time charge related to the Russia-Ukraine war operating cash flow would have come in at $6.8 billion. Year-to-date free cash flow declined from $4.36 billion to $3.75 billion and management did not change their FY22 guidance as they expect to return $7.7 billion to shareholders.

PepsiCo reported a strong and well-executed quarter in which management showed that they are coping well despite the inflationary headwinds. We like our stock position in the company and we are likely to add to the name on any market selloff.

Ford Motor Company (F): The automaker reported earnings of $0.30/share (in-line with WallStreet estimates) and revenue of $37.2 billion (beat WallStreet estimates by $90 million). In comparison to our fund estimates, this was a good quarter from Ford with a slight blemish on the revenue number due to supply chain constraints. We estimated the company would earn $0.24/share on revenue of $37.5 billion. The company reported 10% revenue growth despite all the supply chain woes as it defended its market share. Electric Vehicle (EV) sales were up with Europe being profitable which was surprising given what is going on in Eastern Europe. Management gave a solid outlook from the top of the report to assure investors that FY22 is going according to plan.

Management raised its free cash flow for the fiscal year from $6.5 billion to $10 billion as the company restructures its business towards the EV space. Free cash flow was squeezed this quarter from $7.8 billion to $874 million as the company spends on its EV build-out. Costs were up significantly (approximately $4.5 billion during the quarter) as the company faced inflationary headwinds along its supply chain. The company’s cash & investments declined from $49.6 billion to $40.2 billion as the company invests and gives back some money to shareholders. Overall, this was a strong quarter for Ford despite the slight revenue miss in comparison to our expectations. We will continue to hold the shares because we like the company’s transition into the EV market and the 2% sell-off in the shares after earnings do not deter us.

Brunswick (BC): The boatmaker reported earnings of $2.67/share (beat WallStreet estimates by $0.03) and revenue of $1.69 billion (missed WallStreet estimates by $80 million). Brunswick’s earnings came in well below our estimates of $2.75/share on earnings on $1.76 billion of revenue. The company reported steady revenue growth of 18.2% which is good but not what we had in mind. We expected Brunswick to have close to 20% revenue growth. The company reported an earnings growth of 22% as management navigates this challenging environment. Brunswick’s Parts Business was very strong while the Boat Business was affected by Hurricane Ian and supply chain constraints.

The company’s operating margins are still intact despite inflationary headwinds coming in at 13.7%. Management seems to be executing well and integrating its acquisition from last year pretty well. Brunswick reported strong cash levels up $136 million as they ended the quarter with $500 million on the balance sheet. However, free cash flow declined from $296 million to $126 million as the company paid down debt early and returned cash to shareholders. Management still thinks the fiscal year 2022 will be a record year for the company as they updated revenue guidance to $6.9 billion.

This was a mixed quarter from Brunswick because of the revenue miss mostly but that was beyond management’s control. Consumer cutbacks on spending, and a hurricane coupled with supply chain constraints really hampered what would have been a good earnings report for Brunswick. We continue to hold the stock and we are buyers under $64/share.

Keurig Dr. Pepper Inc. (KDP): The Beverage & Coffee maker reported earnings of $0.46/share (in-line with WallStreet estimates) and revenue of $3.62 billion (missed WallStreet by $10 million). In comparison to our fund estimates, Keurig Dr. Pepper missed on both earnings and revenue as we expected them to report earnings of $0.49/share on revenue of $3.72 billion. For a consumer defensive company, Keurig Dr. Pepper reported impressive revenue growth of 11% (the strong USD ate 80 basis points of growth-very hedged by management). Similar to PepsiCo, KDP raised prices by 12% as they passed on the higher costs to customers.

Looking at the segments, Beverages were the main revenue driver this quarter with Coffee reporting low modest growth. Geographically, Latin America remains a strong region for the company. Operating margins are still intact for the company as operating income grew by 2% as management contends with inflation. The company reported healthy cash flow numbers with free cash flow coming in at $686 million and this helped management to raise its dividend by 6.7%. Management reaffirmed its FY 2022 guidance in terms of sales which was comforting. The company still has room for improvement and this was a mixed quarter overall.

Disclosure: Cresco Investments is long Nike Inc.(NKE), PepsiCo Inc. (PEP), Ford Motor Company (F), Brunswick (BC), and Keurig Dr. Pepper Inc. (KDP).

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is intended for information, engagement & entertainment purposes only, and is not to be construed as investment advice or direction. Investors are strongly encouraged to perform due diligence and/or consult with their financial advisor(s).