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A look at North American equities heading in both directions

On the rise

Shares of Sleep Country Holdings Inc. (ZZZ-T) rose 2.2 per cent following the late Tuesday announcement of the $24-million acquisition of Silk & Snow, an online retailer of bed-in-a-box mattresses and sleep accessories.

“One may ask why Sleep Country acquires another bed-in-a-box company when it has Endy, the largest Canadian bed-in-a-box company, Bloom, its private label bed-in-a-box brand and the recently acquired Hush brand, for which sales appears to be declining,” said Stifel analyst Martin Landry in a note. “This is a fair question and our understanding is that Sleep Country has been attracted by the talent and eCommerce know-how inside S&S. In addition, S&S’s product development has impressed with rapid growth of accessories, which now make more than 50 per cent of sales.”

Given the recent growth rates experienced by S&S, with sales likely up more than 50 per cent year-over-year, one can wonder why the founders are selling now. Also, Silk & Snow is a young company, founded 5 years ago, and the founders do not seem of retirement age. Our understanding is that the founders were looking for a partner to bring the company to the next level and wanted to lock-in some gains while participating in the upside of the company with their 3-year earn out. While it is early, there is a scenario where the founders could remain with Sleep Country for several years.”

Nike Inc.’s (NKE-N) shares soared over 12 per cent on Wednesday as investors shrugged off margin pressure at the sportswear giant and focused on the company’s efforts to fix its inventory problems that have plagued its business in recent quarters.

Peers Vancouver-based Lululemon Athletica Inc. (LULU-Q), Under Armour Inc. (UAA-N) and Vans sneaker maker VF Corp. (VFC-N) were also higher.

At least 12 brokerages raised their price targets on the stock after Nike reported better-than-expected quarterly results on Tuesday, benefiting from higher discounts and strong demand in North America.

“Nike’s second-quarter performance proves the brand remains strong, margin drivers are intact and global demand is healthy,” said Jefferies analyst Randal Konik, who was the most bullish and raised his price target by US$25 to US$140.

In September, Nike said its inventories ballooned 44 per cent to nearly US$10-billion at the end of the first quarter and warned of weaker margins, stoking fears across the industry that consumers were cutting back on discretionary spending due to soaring inflation.

“We believe the inventory peak is behind us as actions we’re taking in the marketplace are working,” Nike Chief Executive Officer John Donahoe said on a post-earnings call on Tuesday.

While Nike’s quarterly inventory declined about 3 per cent from the prior quarter, margins fell 300 basis points due to higher promotions and discounts.

Still, the decline was smaller than expected, according to analysts, thanks also to higher-priced product launches such as the LeBron 20s and Nike Mercurial shoes.

“Nike offered promotions, but at the same time, they also pushed for new product without the promotion,” said Jane Hali & Associates analyst Jessica Ramirez.

Nike saw sales in North America surge 30 per cent, while in China - where the business was recovering from lockdowns - fell only about 3 per cent, following a 16-per-cent slump in the first quarter.

The company’s shares, which have fallen about 38 per cent this year, were at US$117.11 in early trading, while European peers Adidas and Puma also rose nearly 7 per cent and 9 per cent, respectively.

FedEx Corp. (FDX-N) on Tuesday vowed to accelerate “aggressive cost reduction plans” by slashing an additional US$1-billion in costs as it races to get ahead of falling demand for its delivery services.

Shares rose 3.6 per cent after Memphis-based FedEx also reported a bigger fiscal second-quarter profit than Wall street expected.

It now plans to take out US$3.7-billion in costs this year by parking planes, closing offices, stopping rural Sunday delivery and furloughing workers in its freight division.

FedEx Chief Executive Raj Subramaniam said the company was still “navigating a weaker demand environment” and credited cost cutting for the stronger-than-expected profit for the quarter ended Nov. 30.

The global delivery company angered investors and analysts in September when it yanked its forecast, triggering the biggest one-day stock drop in company history.

Critics had previously called CEO Subramaniam’s expense control efforts to tackle the company’s bloated overhead too little and too late.

In particular, they were concerned that FedEx has been underperforming rival United Parcel Service with its more costly unionized workforce.

When the stock market closed on Tuesday, shares of United Parcel Service Inc. (UPS-N) were down 14 per cent from a year ago, versus the 33-per-cent drop in FedEx stock.

On Tuesday, FedEx said second-quarter adjusted profit fell to US$815-million, or US$3.18 per share, from US$1.3-billion, or US$4.83 per share, a year earlier.

Per-share earnings beat analysts’ estimates by 36 US cents, according to Refinitiv I/B/E/S Estimates, while revenue came in at US$22.8-billion - below analysts’ target of US$23.74-billion.

The company forecast 2023 earnings per share to lie between US$13 and US$14, compared with analysts’ average estimate of US$14.08, according to Refinitiv IBES data.

Carnival Corp. (CCL-N) gained ground after it posted a smaller-than-expected quarterly loss as the cruise operator kept a tight lid on operating costs.

Cruise operators including Carnival have been wrestling with rising fuel prices, a stronger U.S. dollar and higher interest rates, which have been further exacerbated due to the ongoing Russia-Ukraine conflict.

Carnival has been removing some of its less efficient ships from the company’s fleet, including two ships from its Costa Cruises line, in an effort to streamline the brand amid continued closure of cruise operations in China.

The company said it also sees occupancy for the current quarter to be 90 per cent or slightly higher, adding it expects occupancy to return to historical levels in the summer of 2023.

“Booking volumes strengthened following the relaxation in protocols, cancellation trends are improving globally, and we have seen a measurable lengthening in the booking curve, across all brands,” said Chief Executive Officer Josh Weinstein.

The cruise operator’s revenue rose to US$3.84-billion in the fourth quarter ending Nov. 30 from US$1.29-billion a year earlier, but missed analysts’ average estimate of US$3.91-billion, according to IBES data from Refinitiv.

The company posted a smaller adjusted net loss of 85 US cents per share compared with analysts’ expectation of 87 US cents.

Cinema chain AMC Entertainment Holdings Inc. (AMC-N) was higher after it said on Wednesday it was no longer in talks to acquire bankrupt Cineworld Group after initial talks with certain lenders.

AMC said the earlier discussions were focused on the acquisition of certain theater assets of Cineworld in the United States and Europe, which would be financed partly through issuance of its preferred stock and debt financing provided by the lenders.

Cineworld, the world’s second-largest cinema chain operator, in October announced a bankruptcy settlement with its landlords and lenders, clearing the way for the company to borrow funds and make a US$1-billion debt repayment.

Cineworld had agreed to explore a sale of the business and allow creditor input on its business plan as part of its bankruptcy settlement.

On the decline

BlackBerry Ltd. (BB-T) fell after it said on Tuesday the sales cycles for its cybersecurity software have become longer and it expects the current macroeconomic environment to pose more challenges in the near term.

Wednesday's analyst upgrades and downgrades

The Canadian technology company said revenue from the cybersecurity business would remain flat in the first half of 2023, but grow in the latter half of the year.

Cybersecurity businesses have not been as affected by economic swings compared to other software sectors that are grappling with clients’ lower spending budgets amid rising costs.

BlackBerry Chief Executive John Chen said the cybersecurity business was regaining momentum and there’s evidence that investments will drive progress towards growth next year.

Revenue from the segment in the third quarter fell about 17 per cent to US$106-million.

Growth in the electric vehicles industry and adoption of connected-car and other safety technologies boosted sales of BlackBerry’s automotive and embedded technology products.

Sales in the Internet of things (IoT) unit, which includes BlackBerry’s QNX automotive software product, rose about 19 per cent to US$51-million in the reported quarter.

The company expects the segment to grow between 15 per cent and 18 per cent this year.

The company said it was seeing some tightening in the North America and European automotive markets, but China and India markets for its QNX automotive software were strong.

BlackBerry reported a net loss of US$4-million in the three-month period ended Nov. 30, compared with an income of US$74-million a year earlier.

Revenue fell 8.2 per cent to US$169-million from US$184-million. Analysts on average had expected revenue of US$168.7-million, according to IBES data from Refinitiv.

Another wave of layoffs are coming at electric-car maker Tesla Inc. (TSLA-Q) in the next quarter, news website Electrek reported on Wednesday, citing a source familiar with the matter.

Tesla is also going to freeze hiring, according to the report.

Shares of Tesla closed down 0.5 per cent in Wednesday trading.

The reported move comes at a time when Tesla investors have raised concerns over Chief Executive Elon Musk’s distraction with managing Twitter, the social media platform he bought for US$44-billion in October.

Moreover, Tesla analysts have also cut their price targets on the stock worried that weakness in demand from China will weigh on the EV maker’s deliveries next year.

Mr. Musk in June said Tesla would reduce its salaried workforce by roughly 10 per cent over the next three months.

Core Scientific Inc. (CORZ-Q), one of the biggest publicly traded cryptocurrency mining companies in the United States, plummeted after it said on Wednesday it filed for Chapter 11 bankruptcy protection, the latest in a string of failures to hit the sector.

More than a trillion in value has been wiped out from the crypto sector this year on rising interest rates and exacerbating worries of an economic downturn. The slump has eliminated key industry players such as Three Arrows Capital and Celsius Network.

The bigger blow came after major crypto exchange FTX filed for bankruptcy protection last month. Its swift fall has also sparked tough regulatory scrutiny of how crypto firms hold funds and conduct business operations.

Several crypto companies have since been plagued by contagion concerns from the fallout of the FTX collapse, which has quashed hopes of a recovery in prices of digital assets in the near-term.

After rapid growth in 2020 and 2021, bitcoin - the most popular digital currency by far - is down more than 60 per cent this year, pressuring the crypto mining sector.

Core Scientific said in a statement the bankruptcy filing was necessitated by a decline in the company’s operating performance and liquidity amid the prolonged decrease in the price of bitcoin.

The company’s shares have lost roughly 98 per cent of their value so far in 2022, shrinking its market cap to about US$78-million. The stock fell further on Wednesday. Shares of other crypto miners including Riot Blockchain Inc. (RIOT-Q), Marathon Digital Holdings Inc. (MARA-Q) and Hut 8 Mining Corp. (HUT-T) have all shed more than 80 per cent this year.

Austin, Texas-based Core Scientific said it would not liquidate and would continue to operate normally, as it expects to enter into a restructuring support agreement with its creditors, who represent over 50 per cent of the holders of its convertible notes.

Core Scientific said its creditors have also agreed to provide up to $56-million in debtor-in-possession financing.

One of the largest creditors of Core Scientific, B. Riley Financial Inc, had offered $72-million last week to avoid the bitcoin miner’s bankruptcy.

In its bankruptcy petition, Core Scientific said it has US$1-billion to US$10-billion in assets and liabilities, and creditors between 1,000 and 5,000.

Core Scientific went public in 2021 through a merger with a blank-cheque company in a deal that at the time valued the miner at US$4.3-billion.

With files from staff and wires