With Federal Reserve rate hikes dominating the market agenda this week, shares of AI infrastructure company Forget Power Solutions moved in the opposite direction, rising about 20% over the week. The company reported 94% year-over-year revenue growth for its fiscal fourth quarter on Wednesday, shifting investor attention to upcoming results from restaurant operators, retailers and enterprise software distributors.
Darden Restaurants is scheduled to report before Thursday's opening bell. The company owns brands including Olive Garden and LongHorn Steakhouse, but its shares have recently pulled back from their highs and moved below the 50-day moving average. Cheesecake Factory and Brinker International, the parent of Chili's, have also fallen below their 50-day averages, leaving technical signals across the restaurant sector mixed.
Darden faces expectations for slower growth
Olive Garden, Darden's largest brand, generated $5.6 billion in revenue in the latest fiscal year ended in May, accounting for slightly more than 40% of the company's total revenue. LongHorn Steakhouse contributed about $3 billion. Darden's other brands include Yard House, Cheddar's Scratch Kitchen, Ruth's Chris Steak House, The Capital Grille and Tex-Mex chain Chuy's.
Darden shares initially opened 4% higher on Monday, moving back above the 50-day moving average and closer to their record high. The buying did not last, however, and selling pressure returned. In the previous quarter, reported at the end of June, adjusted earnings per share rose 23% year over year to $3.66, while revenue increased 14% to slightly more than $3.7 billion.
The market expects Darden's growth to slow in the first quarter. Analysts forecast earnings of $2.05 per share, up 4% from a year earlier, on revenue of $3.2 billion, up 5%. For restaurant companies, traffic, same-store sales and consumer spending on dining out will be key figures in assessing the results and valuation.
Cracker Barrel changes chief executive
Cracker Barrel is due to report before Wednesday's opening bell. When the company reported in June, adjusted earnings came in at 29 cents per share, well above the average market forecast for a loss of 48 cents. Revenue reached $797.4 million, about $20 million above expectations, but was still down 4% from the year-earlier period.
The company's same-store sales had been relatively stable before controversy over its logo and a planned redesign triggered a strong backlash. Cracker Barrel later abandoned the plan, but same-store sales fell 8.5% in the quarter ended in October last year and declined another 7.9% in the quarter ended in January. The decline narrowed to 1.8% in the quarter ended in May.
Cracker Barrel has appointed David Deno as chief executive, effective August 10. He succeeds Julie Masino, who left after the dispute over the brand revamp. Deno previously served as chief executive of Bloomin' Brands, the owner of Outback Steakhouse. The source material lists his tenure as running from 2019 to 2014, an internally inconsistent sequence of years. The management change remains important context for investors assessing the company's earnings guidance.
Paychex revenue growth may ease
Shares of payroll and human-resources outsourcing company Paychex are now trading near, and below, the 10-week moving average after a strong rebound. The company has an earnings stability rating of 3 on a scale of 1 to 99, with 1 representing the highest rating. A long record of sustained earnings growth is one reason for the relatively strong ranking.
Paychex has reported solid revenue performance in recent quarters. After several consecutive quarters of single-digit growth, the company has delivered double-digit revenue growth for five straight quarters. The market nevertheless expects that pace to moderate in the upcoming report. Analyst estimates compiled by FactSet call for revenue of $1.63 billion, an increase of 6% from a year earlier.
Costco shares retreat about 13%
Best Buy, Abercrombie & Fitch and Target have been among the stronger recent performers in retail, while Costco shares have come under clear pressure over the past several months. The stock reversed from a high in the second half of May and has since fallen about 13%. Over the same period, the S&P 500 has gained slightly more than 2%.
Costco has historically traded at a premium valuation to its peers, while the pace of sequential membership additions has shown signs of slowing. After the pullback, the stock trades at roughly 45 times earnings, or about 41 times expected earnings. Valuation will therefore remain a central factor in how investors interpret the report.
Costco is also scheduled to report before Thursday's opening bell. The market expects adjusted earnings per share to rise 11% to $6.53, with revenue up 10% to $94.9 billion. Investors will focus on membership revenue, same-store sales and management's comments on consumer demand.
TD SYNNEX benefits from AI infrastructure orders
Technology hardware and software distributor TD SYNNEX continues to benefit from enterprise IT spending. The company connects technology manufacturers with resellers, and both earnings and revenue growth have accelerated in recent quarters.
Results released in June showed quarterly profit rising 62% and revenue increasing 31% year over year to $19.6 billion. Revenue growth has accelerated for three consecutive quarters. The company's Hyve business builds AI infrastructure for cloud-computing customers, and quarterly gross billings rose 95% from a year earlier, making it an important contributor to the results.
TD SYNNEX's performance shows that AI investment is appearing beyond the results of chipmakers and cloud-service providers. Demand from enterprise customers is also reaching the distribution channels for servers, software and infrastructure. Whether the growth continues will depend in part on cloud customers' capital spending and the durability of corporate IT budgets.
Options market prices in a large earnings move
Options on TD SYNNEX imply a potential share-price move of about 25 points in either direction around the earnings report. The estimate is based on the combined premiums of the at-the-money call and put with a $260 strike expiring September 18. It reflects the market's pricing of the potential event-driven move, not a view on the direction of the stock.
When TD SYNNEX was trading at about $266, a monthly $270 call expiring October 16 had a midpoint premium of approximately $10.60 per share, equivalent to about 4% of the underlying stock price. One options contract represents 100 shares, putting the premium at roughly $1,060. If the holder ultimately exercises, the 100 shares represented by the strike have a notional value of $27,000. Including the premium, the stock would need to rise to about $280.60 for the position to break even.
A call gives its holder the right to buy 100 shares at the agreed strike price, while a put is generally used to position for a decline in the stock. Option prices are also affected by time to expiration, the strike price, bid-ask spreads and implied volatility. Implied volatility often rises before an earnings release, which can increase premiums. Contracts close to expiration may have lower premiums, but their time value declines more quickly. The quoted prices reflect market conditions at that time; actual gains or losses will also depend on any gap in the stock, liquidity and changes in volatility.