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A look at North American equities heading in both directions

On the rise

Palo Alto Networks Inc. (PANW-Q) raised its annual forecasts for revenue and adjusted profit after the bell on Tuesday as enterprise customers shift to one-stop shops for their cybersecurity needs in a bid to reduce costs.

Shares of the Santa Clara, California-based company gained 7.7 per cent in Wednesday trading.

A rise in cyber crime and the growing digital presence of businesses and governments have fed demand for cybersecurity software, helping soften the impact from technology budgets shrinking in the face of high interest rates and inflation.

“The market is tough and definitely more challenging than when we started the year,” the company said during its earnings call. “We are fortunate to be focused upon a technology market that is more resilient.”

It is also working on embedding generative AI, the technology behind chatbot sensation ChatGPT, into products and workflows.

“Raised guidance for Q4 billings growth gives us more confidence to expect demand headwinds to ease incrementally as we set up for stronger performance in FY24,” said Janice Quek, equity analyst at CFRA Research.

Palo Alto, which counts Accenture and Salesforce among its clients, now expects 2023 adjusted net income per share of US$4.25 to US$4.29, from US$3.97 to US$4.03 estimated earlier.

It increased the lower end of its full-year revenue outlook to between US$6.88-billion and US$6.91-billion, compared with a prior forecast of $6.85 billion to US$6.91-billion.

The company also forecast fourth-quarter revenue between US$1.94-billion and US$1.97-billion, compared with analysts’ estimates of US$1.95-billion, according to Refinitiv data.

Calling the results “Jimmy Butler-like,” Wedbush analyst Dan Ives said: “Taking a step back, the cloud transformation at PANW is well underway and the company is becoming the dominant player of cyber security as larger more strategic deals are getting inked despite the others in cyber seeing elongated sales cycles and deals getting pushed out. PANW remains as our top cyber security name and one of our favorite tech names.”

Kohl’s Corp. (KSS-N) on Wednesday reported a surprise profit as the department store operator’s efforts to reduce excess inventory and slash costs under a newly appointed CEO started paying off, sending its shares up 7.6 per cent.

The company also maintained its full-year targets even as it posted a bigger-than-expected drop in quarterly comparable store sales.

Kohl’s is attempting a turnaround under CEO Tom Kingsbury who took the helm in February. Its efforts to reduce reliance on margin-sapping discounts to cut inventory and focus on in-demand categories including work wear are already showing results.

First-quarter operating expenses fell 4.2 percent to US$1.2-billion, while gross margin grew by 67 basis points, as the company’s inventory fell by 6 per cent.

Earnings per share came in at 13 US cents, compared with analysts’ average expectation of a loss of 42 US cents, according to Refinitiv IBES data.

Fitch analyst David Silverman said the quarter was “a step in the right direction for Kohl’s to position 2023 as a year of operating income and cash flow growth against a challenging 2022.”

For full-year 2023, Kohl’s maintained its forecast for earnings per share in the range of US$2.10 to US$2.70, and a 2-per-cent to 4-per-cent dip in net sales.

Several U.S. retailers are facing slowing demand as inflation-hit customers curb spending on non-essential items. Target (TGT-N) and home improvement chain Home Depot (HD-N) have taken a conservative approach in their annual forecasts.

“The U.S. consumer is definitely showing signs of cracking when you look at durable goods,” said CFRA Research analyst Zachary Warring, adding the retailers’ outlook has been extremely gloomy.

The challenging retail environment also drove a 4.3-per-cent decline in Kohl’s first-quarter comparable sales, compared with analysts’ average estimate of a 3.9-per-cent fall.

Last year, Kohl’s shares had lost half their value as the company faced shareholder unrest due to disappointing sales and failed negotiations for a sale of its business

Abercrombie & Fitch Inc. (ANF-N) raised its annual sales on Wednesday, banking on steady demand for its clothes and accessories even as inflation eats into household budgets.

Shares of the Ohio-based retailer jumped 31 per cent in Wednesday trading.

The apparel retailer has benefited from its efforts to right-size its inventory across all its labels, attracting affluent customers to shop for a diverse range of products like dresses and cargos, as they get back to working from offices and social events.

The results come at a time when industry peers such as Lululemon Athletica Inc. (LULU-Q), Urban Outfitters Inc. (URBN-Q) and American Eagle Outfitters (AEO-N) have also seen steady demand for their product assortment and accessories.

The company now expects 2023 net sales to increase 2 per cent to 4 per cent, compared to previous range of 1-per-cent to 3-per-cent growth.

The company’s net sales rose to about US$836-million in the first quarter ended April 29, from about US$812.8-million a year earlier. Analysts on average had expected US$814.5-million, according to Refinitiv IBES data.

Citi analyst Paul Lejuez said: “1Q was an all around great quarter with ANF beating expectations on both sales (3 per cent vs consensus flat) and GM (up 540 basis points vs cons up 310bps). While many were bracing for guidance to be lowered, management raised F23 guidance to $2.30 at the midpoint vs $1.50 prior and cons $1.40. The A&F brand is growing beyond expectations, growing 14 per cent in 1Q, in-line with 4Q despite a general slowdown in consumer discretionary spending in 1Q. And while Hollister is weak and decelerated vs 4Q (down 7 per cent vs down 4 percent), it is performing better than we expected in this environment. Trends have not slowed 2QTD with management guiding 2Q sales up 4-6 per cent (vs consensus up 1 per cent). F23 EBIT margin guidance was raised from 4-5 per cent to 5-6 per cent as management now expects freight/lower product costs to be more beneficial (250 bps vs 200 bps prior). Stepping back, this was a great quarter all around and we expect shares to trade higher.”

On the decline

Shares of Bank of Montreal (BMO-T) were lower by 3.9 per cent after it reported lower second-quarter profit and missed analysts’ estimates as the lender integrates its takeover of California-based Bank of the West and increases loan loss provisions as economic uncertainty weighed on results.

BMO earned $1.06-billion, or $1.30 per share, in the three months that ended April 30. That compared with $4.76-billion, or $7.13 per share, in the same quarter last year, or $3.23 per share when adjusted to exclude certain items.

Analysts lower profit expectations for banks as pressure grows to increase provisions for loan losses

On an adjusted basis, excluding acquisition and integration costs from its purchase of Bank of the West and other items, the bank said it earned $2.93 per share. That fell below the $3.16 per share analysts expected, according to Refinitiv. It’s the first quarter that BMO has reported earnings that include results from the U.S. bank it purchased from BNP Paribas SA, a deal that closed on Feb. 1.

“Our performance this quarter reflects our highly-diversified business mix and the strength, size and stability of our balance sheet, which has been further enhanced by the successful acquisition of Bank of the West,” BMO chief executive officer Darryl White said in a statement.

The bank raised its quarterly dividend by 4 cents to $1.47 cents per share.

In a research note, Credit Suisse analyst Joo Ho Kim said: “BMO’s Q2 results missed us and consensus expectation, with some noise added due to the first quarter impact from the Bank of the West acquisition. On the negative side, the bank reported lower-than-expected revenue, as weaker Capital Markets in particular took a toll, while BotW additions on deposits and loans were also lower than what we were looking for (even including the FV marks). On the flip side, NIMs were better than expected and the CET1 ratio was also better (but in line with consensus). Deposits were up 3 per cent quarter-over-quarter in Canada, but down 2 per cent quarter-over-quarter in the U.S. organically (due to commercial deposits decline).”

- Stefanie Marotta

Bank of Nova Scotia (BNS-T) also fell after it reported lower second-quarter profit and missed analysts’ estimates as the lender set aside more loan loss provisions and a tighter economic environment weighed on growth.

Scotiabank earned $2.16-billion, or $1.69 per share, in the three months that ended April 30. That compared with $2.75-billion, or $2.16 per share, in the same quarter last year.

Adjusted to exclude certain items, the bank said it earned $1.70 per share. That fell below the $1.77 per share analysts expected, according to Refinitiv.

“I am pleased with the Bank’s stable operational performance in the quarter and encouraged that our strong capital and liquidity profile positioned us well to manage through the current environment of heightened macroeconomic uncertainty,” Scotiabank chief executive officer Scott Thomson said in a statement.

The bank raised its quarterly dividend by 3 cents to $1.06 per share.

Scotiabank is the first major Canadian bank to report earnings for the fiscal second quarter. Royal Bank of Canada (RY-T), Toronto-Dominion Bank (TD-T) and Canadian Imperial Bank of Commerce (CM-T) will release their results Thursday, and National Bank of Canada (NA-T) next week.

In the quarter, Scotiabank set aside $709-million in provisions for credit losses — the funds banks reserve to cover loans that may default. That was higher than analysts anticipated, and included $88-million against loans that are still being repaid, based on models that use economic forecasting to predict future losses. In the same quarter last year, Scotiabank had set aside $219-million in provisions.

Total revenue fell slightly in the quarter to $7.93-billion as expenses rose to $4.58-billion.

Credit Suisse analyst Joo Ho Kim said: “Scotia delivered a miss on both us and consensus in Q2, with expenses coming in higher than previously guided to. On one hand, the bank reported better than expected NIMs performance across both Canadian and International Banking (and at the all-bank level for that matter), the CET1 ratio climbed above 12 per cent, and deposits were up quarter-over-quarter across the P&C businesses. These were offset by higher-than-expected expenses (up 14 per cent year-over-year from CB, IB, and GBM), which remains in focus for the sector, as well as slowing loan growth across CB & IB (which drove flattish organic RWA that helped in the CET1 ratio bump).”

- Stefanie Marotta

Analog Devices Inc. (ADI-Q) said on Wednesday that a turbulent economy would weigh on its third-quarter results, sending the chipmaker’s shares down in Wednesday trading.

The company forecast third-quarter revenue of US$3.10-billion, plus or minus US$100-million, the midpoint of which was lower than analysts’ estimates of US$3.16-billion, according to Refinitiv data.

Analog Devices also said it expects current-quarter adjusted profit of US$2.52 per share, plus or minus 10 US cents, below estimates of US$2.65 per share.

The dour forecast mirrors the weakness seen at peer Texas Instruments Inc last month, with the chip industry struggling to shake off a slump that has led to a pile-up of inventory.

“Looking to the second half, we expect revenue to moderate given the continued economic uncertainty and normalizing supply chains,” Analog Devices Chief Executive Vincent Roche said on Wednesday.

Resilient demand from the industrial and automotive sectors helped the company’s second-quarter revenue rise 10 per cent to US$3.26-billion, beating estimates.

Revenue at the company’s industrial segment, which accounts for more than half of Analog Devices’ revenue, rose 16 per cent, while the automotive segment’s revenue increased 24 per cent.

The company earlier in May said that it would invest 630 million euros (US$693.50-million) in a new research and development and manufacturing plant in Ireland, as it looks to boost its production capacity in Europe.

With files from staff and wires

Follow David Leeder on Twitter: @daveleederOpens in a new window

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